HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by wackerdr »

zarci wrote: Mon Aug 17, 2020 11:41 am
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?
Yes. that's the gist. I also updated my original response to add a bit more perspective.
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zarci
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zarci »

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

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.
At what level would the 3x Total Stock fund be considered "wiped out"? That is, being stuck at such a low level it could not possible come back? I remember Hedgefundie mentioning a prior case of a fund jumping back from historic lows, but could not find the reference. Would it be 33.33%? A bit less than that, say 25%?

Do you mean to say you would purchase QQQ using the spare cash position, in the event of a major market dive? Does that imply that you would essentially have to stay up-to-date on the daily movements of QQQ? As in, you wouldn't be able to go for a 2 week holiday off the grid without risking missing the window of opportunity there, right?

And perhaps most interestingly, at what point would you take your returns off the table? It would seem your expected returns are thrice that of a 70/30 portfolio, but you seem to hint at it being unlikely that a portfolio like this could last for a period of 50 years or so. Is there a point where you'd say - Halt! I made what I wanted to make and I'm cashing out?
wackerdr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by wackerdr »

zarci wrote: Mon Aug 17, 2020 11:55 am
wackerdr wrote: Mon Aug 17, 2020 11:29 am ...

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.
At what level would the 3x Total Stock fund be considered "wiped out"? That is, being stuck at such a low level it could not possible come back? I remember Hedgefundie mentioning a prior case of a fund jumping back from historic lows, but could not find the reference. Would it be 33.33%? A bit less than that, say 25%?

Do you mean to say you would purchase QQQ using the spare cash position, in the event of a major market dive? Does that imply that you would essentially have to stay up-to-date on the daily movements of QQQ? As in, you wouldn't be able to go for a 2 week holiday off the grid without risking missing the window of opportunity there, right?
See the YTD comparison of SPY / UPRO and QQQ/TQQQ . Both UPRO and TQQQ are 3X the underlying index, but the outcomes are different.

3X long stock fund will not get wiped out to 0 in a single day because IIRC, the trading stops at 20% decline. So a QQQ decline of 20% means, a TQQQ decline of 60%. Then the clock resets for the following day. Regardless you can place limit orders at whatever level to stop loss.

A series of bad days and prolonged bad period will deliver a near death blow, but TQQQ will not technically dead. That's where cash position to rebalance, or ability to put more cash comes in handy. So my cash position is permanent allocation in the leveraged portfolio, that will be rebalanced quarterly.
Last edited by wackerdr on Mon Aug 17, 2020 12:08 pm, edited 3 times in total.
wackerdr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by wackerdr »

wackerdr wrote: Mon Aug 17, 2020 12:04 pm
zarci wrote: Mon Aug 17, 2020 11:55 am
wackerdr wrote: Mon Aug 17, 2020 11:29 am ...

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.
At what level would the 3x Total Stock fund be considered "wiped out"? That is, being stuck at such a low level it could not possible come back? I remember Hedgefundie mentioning a prior case of a fund jumping back from historic lows, but could not find the reference. Would it be 33.33%? A bit less than that, say 25%?

Do you mean to say you would purchase QQQ using the spare cash position, in the event of a major market dive? Does that imply that you would essentially have to stay up-to-date on the daily movements of QQQ? As in, you wouldn't be able to go for a 2 week holiday off the grid without risking missing the window of opportunity there, right?
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

zarci wrote: Mon Aug 17, 2020 11:19 am Thank you, cos.
No problem! :mrgreen:
zarci wrote: Mon Aug 17, 2020 11:19 am 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.
Yes, this is true.
zarci wrote: Mon Aug 17, 2020 11:19 am 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.
I'm not using margin loans so no, this is not true. Most of us are using leveraged ETFs.
zarci wrote: Mon Aug 17, 2020 11:19 am 3. You believe the maximum drawdown of stock would be something like 50%. Thereby leveraging between 100% and 200% is safe.
This strategy makes no assumptions about the maximum drawdown of stocks. It relies only on the use of leveraged ETFs and the existence of circuit breakers.
zarci wrote: Mon Aug 17, 2020 11:19 am 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.
At least for me, this part is true. I'm utilizing an unsecured personal loan in conjunction with leveraged ETFs. Again, though, this is not necessary for HEDGEFUNDIE's strategy.
zarci wrote: Mon Aug 17, 2020 11:19 am I probably missed other options. The core question remains; Why do you think you'll not have a 100% drawdown?
Because, if you limit yourself to leveraged ETFs, a 100% drawdown is impossible, and this impossibility is reinforced by the existence of circuit breakers. Theoretically, a 99.999…% drawdown is possible, but such a drawdown is incredibly unlikely to manifest in practice. We'd have much bigger problems on our hands than the value of our portfolios at that point, at least those of us living and working in the US.
zarci wrote: Mon Aug 17, 2020 11:19 am 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?
As you said, if it hits the fan, I'm willing and able to start from scratch.
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Here's an interesting proposition - if we're concerned about the future of TMF, how about a hedge that will behave much more predictably -- volatility itself:

UPRO/VXX 75/25, quarterly re-balance

Obviously the big caveat is VXX only goes back too 2019 :mrgreen:

Does anyone know a VIX-like ETN that's been around longer? Apologies if this has already been covered.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

I had this brilliant idea already, and the short answer is you can't hold VXX because they lose too much money rolling futures. That little "nice" moment just comes from rebalancing on January 1, VXX jumps up real high, you rebalance on April 1, hooray! The rest of the time it'll be awful.
A fool and your money are soon partners
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

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

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.
You might still have lost everything in 2000 even with 10% cash, because QQQ just kept dropping for two years. Rote rebalancing would have kept shifting money from ro TMF into TQQQ to die. Most adaptive allocation approaches would have held enough TQQQ at various times to bleed out. And most humans would not wait >2 years to time the bottom. Exiting entirely and waiting for QQQ to go above its 200-day SMA to re-enter would have worked, but in general the SMA timing model seems to be a pretty big drag on returns in good times.

Still contemplating my exit strategy for this kind of scenario, I have some faith that min variance would offer some initial protection and that I'd manually pause further rebalancing based on things like SMA200 and unemployment numbers. I'd rather have a pre-defined strategy that takes psychology out of the equation, but I'm not sure there's a good one.
Last edited by Semantics on Mon Aug 17, 2020 6:45 pm, edited 2 times in total.
wackerdr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by wackerdr »

Semantics wrote: Mon Aug 17, 2020 6:35 pm
wackerdr wrote: Mon Aug 17, 2020 11:29 am
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

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.
You might still have lost everything in 2000 even with 10% cash, because QQQ just kept dropping for two years. Rote rebalancing would have kept shifting money from ro TMF into TQQQ to die. Most adaptive allocation approaches would have held enough TQQQ at various times to bleed out. And most humans would not wait >2 years to time the bottom. Exiting entirely and waiting for QQQ to go above its 200-day SMA to re-enter would have worked, but in general the SMA timing model seems to be a pretty big drag on returns in good times.
True, it wouldn't have recovered to any meaningful level, without new dollars coming into the portfolio beyond 2002. A simulated TQQQ from 2000 is horrendous to look at.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rockstar »

danyboy7 wrote: Mon Aug 17, 2020 5:23 am
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 think, the idea behind this strategy is to use a negative correlating leveraged ETFs to go along with UPRO. Gold doesn't really fit the bill. Cash has some negative correlation, but there are other possibilities.

One idea is to use international. Both Japan and Germany are currently negative correlating against the US market (S&P 500). They both provide good yields too. I haven't done a deep dive into this, but it's an alternative to TMF that might be worth exploring.

FYI: I sold my TQQQ holdings in extended hours. Like ten minutes ago. I sell whenever I bank 10% or more returns and buy on big dips. I'm waiting for VXN to get in the twenties before buying and holding this.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

firebirdparts wrote: Mon Aug 17, 2020 5:04 pm I had this brilliant idea already, and the short answer is you can't hold VXX because they lose too much money rolling futures. That little "nice" moment just comes from rebalancing on January 1, VXX jumps up real high, you rebalance on April 1, hooray! The rest of the time it'll be awful.
XVZ might be a reasonable alternative if one wants a tail-risk hedge. It doesn't bleed much value to futures roll unless the curve becomes steep at the long-term end, which did happen in ~2013. It wasn't helpful for slower declines like 2018, but might be a useful cash alternative in times where it's not decaying (e.g. as out-of-market asset with a target volatility strategy it would have performed phenomenally in March).
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

firebirdparts wrote: Mon Aug 17, 2020 5:04 pm I had this brilliant idea already, and the short answer is you can't hold VXX because they lose too much money rolling futures. That little "nice" moment just comes from rebalancing on January 1, VXX jumps up real high, you rebalance on April 1, hooray! The rest of the time it'll be awful.
I just tried with UVXY which goes back to 2012 and yup, it doesn't work.
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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

rockstar wrote: Mon Aug 17, 2020 6:48 pm
danyboy7 wrote: Mon Aug 17, 2020 5:23 am
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 think, the idea behind this strategy is to use a negative correlating leveraged ETFs to go along with UPRO. Gold doesn't really fit the bill. Cash has some negative correlation, but there are other possibilities.

One idea is to use international. Both Japan and Germany are currently negative correlating against the US market (S&P 500). They both provide good yields too. I haven't done a deep dive into this, but it's an alternative to TMF that might be worth exploring.

FYI: I sold my TQQQ holdings in extended hours. Like ten minutes ago. I sell whenever I bank 10% or more returns and buy on big dips. I'm waiting for VXN to get in the twenties before buying and holding this.
Do you mean japanese and German bonds ? I have a Bund 10 years duration leveraged x3 etf available. So far it has done great but I would like to backtest it for a greater period ( I guess it's an another thing I'm gonna ask to siamond....)
I have seen the light
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Tue Aug 18, 2020 9:37 am
coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

Semantics wrote: Tue Aug 18, 2020 2:01 pm
taojaxx wrote: Tue Aug 18, 2020 9:37 am
coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Thanks Semantics - I learned from your thinking.
taojaxx
Posts: 111
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Semantics wrote: Tue Aug 18, 2020 2:01 pm
taojaxx wrote: Tue Aug 18, 2020 9:37 am
coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
rockstar
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rockstar »

danyboy7 wrote: Tue Aug 18, 2020 2:04 am
rockstar wrote: Mon Aug 17, 2020 6:48 pm
danyboy7 wrote: Mon Aug 17, 2020 5:23 am
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 think, the idea behind this strategy is to use a negative correlating leveraged ETFs to go along with UPRO. Gold doesn't really fit the bill. Cash has some negative correlation, but there are other possibilities.

One idea is to use international. Both Japan and Germany are currently negative correlating against the US market (S&P 500). They both provide good yields too. I haven't done a deep dive into this, but it's an alternative to TMF that might be worth exploring.

FYI: I sold my TQQQ holdings in extended hours. Like ten minutes ago. I sell whenever I bank 10% or more returns and buy on big dips. I'm waiting for VXN to get in the twenties before buying and holding this.
Do you mean japanese and German bonds ? I have a Bund 10 years duration leveraged x3 etf available. So far it has done great but I would like to backtest it for a greater period ( I guess it's an another thing I'm gonna ask to siamond....)
Definitely back test it. I'm going back and forth between cash for now.

I'm sticking to my current strategy while volatility remains high (VXN > 29): buying on 3% or greater dips of TQQQ and selling once I'm up 10% or more. So far I've done this 5x since I started in June. I'm waiting to buy back in again. With the VXN under 30 for the past two days, I might end up holding the next time I buy.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

taojaxx wrote: Tue Aug 18, 2020 5:09 pm Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
That's exactly why I want TIPS.

Long term treasuries have ~1% of yields fall, maybe ~2.5% if you believe LTT interest rates will go negative; which I doubt.

TIPS's real yield can go down and down, though; especially as helicopter money stimulates the economy which is the only remaining form of monetary policy that will be available, as all yields reach their effective lower bounds. There is no effective lower bound for TIPS.

Image

EUR and JPN are two countries with bond rates near current levels prior to the crisis. Bond returns can be mathematically modeled; it's no black magic. We KNOW USD LTTs will perform like EUR and JPN bonds, unless long term rates go into the negatives.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Tue Aug 18, 2020 5:09 pm
Semantics wrote: Tue Aug 18, 2020 2:01 pm
taojaxx wrote: Tue Aug 18, 2020 9:37 am
coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

coingaroo wrote: Wed Aug 19, 2020 4:50 am
taojaxx wrote: Tue Aug 18, 2020 5:09 pm Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
That's exactly why I want TIPS.

Long term treasuries have ~1% of yields fall, maybe ~2.5% if you believe LTT interest rates will go negative; which I doubt.

TIPS's real yield can go down and down, though; especially as helicopter money stimulates the economy which is the only remaining form of monetary policy that will be available, as all yields reach their effective lower bounds. There is no effective lower bound for TIPS.
It will only go down and down if that helicopter money has a larger effect than the market expects.

There was helicopter money all through the 2010s, yet TIPS underperformed treasuries because it didn't result in as much inflation as the markets expected.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Semantics wrote: Wed Aug 19, 2020 1:06 pm
taojaxx wrote: Tue Aug 18, 2020 5:09 pm
Semantics wrote: Tue Aug 18, 2020 2:01 pm
taojaxx wrote: Tue Aug 18, 2020 9:37 am
coingaroo wrote: Tue Aug 18, 2020 6:15 am After reading https://www.bridgewater.com/grappling-w ... everywhere (which I highly recommend), you know what I think would be nice?

A 3x leveraged TIPS fund.
I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Wed Aug 19, 2020 7:44 pm
Semantics wrote: Wed Aug 19, 2020 1:06 pm
taojaxx wrote: Tue Aug 18, 2020 5:09 pm
Semantics wrote: Tue Aug 18, 2020 2:01 pm
taojaxx wrote: Tue Aug 18, 2020 9:37 am

I mentioned LTPZ 3 or 4 pages upthread, leveraged on margin if HFEA is a small part of your brokerage account so you stay well within you Reg T margin to avoid margin calls. Works for me so far. That's in taxable obviousy, no margin on tax sheltered.
Was actually thinking of calling PIMCO to suggest a TIPS LETF :)
Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
taojaxx
Posts: 111
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Semantics wrote: Wed Aug 19, 2020 11:16 pm
taojaxx wrote: Wed Aug 19, 2020 7:44 pm
Semantics wrote: Wed Aug 19, 2020 1:06 pm
taojaxx wrote: Tue Aug 18, 2020 5:09 pm
Semantics wrote: Tue Aug 18, 2020 2:01 pm

Hmm, I don't understand whether there are fundamental reasons TIPS would be preferable in this strategy or whether it's speculation. The rationale I've seen is that they provide protection against inflation - but don't they only outperform if inflation is unexpectedly high? (Any discrepancy is arbitraged away.) A corollary of that is they will underperform if inflation is unexpectedly low, like during an economic crash, or just a sluggish economy like we had the past decade. One would figure that in the long run the periods where inflation expectations are too low and too high would cancel out.

Backtesting LTPZ (15+ year TIPS) and 0.1*IEF + 0.9*TLT (using this combo to match the weighted average maturity of LTPZ) in a 60/40 equities portfolio from 2010-now, the treasuries portfolio had higher returns, and significantly lower volatility. If my understanding is right, I would expect that on average you'll get slightly worse returns and significantly worse risk-adjusted returns with LTPZ given the weaker negative correlation with equities.

So, seems to me that using TIPS in this strategy is a bet that inflation will exceed the market's expectations. I can see why people would be inclined to do so but is there something more to it that I'm missing?

Edit: Found some insight I was overlooking in the TIPS thread - when the bonds are viewed in isolation, the TIPS will have the same expected return as treasuries, but be less volatile because they eliminate a source of variance (unexpected inflation or lack thereof). So I would totally prefer TIPS if that were the only thing in my portfolio. But in a balanced portfolio it seems when choosing between two assets with the same return, I'd rather have the more volatile one if it's much more negatively correlated with the rest of the portfolio.
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
Took me some time to wrap my head around that "short TIPS long TLT" thingy but I think I got it. It ends up being an (imperfect) protection against deflation, which is the least likely scenario as authorities will throw everything at it to avoid falling there: death spiral of higher real yields and lower cash flows.
Policy makers are much more likely to tolerate inflation -or, should they fail, stagflation so that's what the strategy should guard against, hence TIPS (and possibly gold). So the portfolio should be LONG the breakeven rate, rather than short as you advocate. So long TIPS short TLT would make more sense.
Just my $.02
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PicassoSparks
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by PicassoSparks »

Historically TIPS are slightly positively correlated and long treasuries are somewhat negatively correlated to the stock market. Going short LTT seems like doing the opposite of what needs to happen to counterweight UPRO.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

PicassoSparks wrote: Fri Aug 21, 2020 4:49 am Historically TIPS are slightly positively correlated and long treasuries are somewhat negatively correlated to the stock market. Going short LTT seems like doing the opposite of what needs to happen to counterweight UPRO.
You are not going short LTT in itself: you go short LTT AND long TIPS at the same time, so long the breakeven. That's if you think we have changed regime and the last 40 years are over as LTT hit the zero rate wall so policymakers need to change their crash fighting toolkit.
Not me saying that, check Bridgewater oft quoted article
https://www.bridgewater.com/grappling-w ... everywhere
guyinlaw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw »

Did anyone do a simulation for TQQQ similar to UPROSIM and TMFSIM?

Is it right that if one invested in TQQQ in 2000, they are still under water?
Time is your friend; impulse is your enemy. - John C. Bogle
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Thu Aug 20, 2020 10:11 pm
Semantics wrote: Wed Aug 19, 2020 11:16 pm
taojaxx wrote: Wed Aug 19, 2020 7:44 pm
Semantics wrote: Wed Aug 19, 2020 1:06 pm
taojaxx wrote: Tue Aug 18, 2020 5:09 pm
Other side of TIPS is while nominal yields are capped at zero (or close to zero), to quote Bridgewater's article, "there is no lower limit to either real yields or breakeven inflation", hence no cap to LT TIPS potential appreciation. That's one response to the TMF conundrum, "which asset can offer a hedge to UPRO crash". PV is nice but I wouldn't attach too much importance to backtesting TIPS on it: TIPS are a choice for a totally different situation from that of the last 20 years. If, as the OP, you believe inflation is dead for sure, then UPRO/TMF is fine for all the reasons he stated (TMF not a source of income but just a hedge, bond convexity).
The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
Took me some time to wrap my head around that "short TIPS long TLT" thingy but I think I got it. It ends up being an (imperfect) protection against deflation, which is the least likely scenario as authorities will throw everything at it to avoid falling there: death spiral of higher real yields and lower cash flows.
Policy makers are much more likely to tolerate inflation -or, should they fail, stagflation so that's what the strategy should guard against, hence TIPS (and possibly gold). So the portfolio should be LONG the breakeven rate, rather than short as you advocate. So long TIPS short TLT would make more sense.
Just my $.02
This construction does guard against deflation, but that's not too important to me. The main properties I'm interested in are that a) it guards against lower than expected *in*flation (crash protection), and b) it is neutral to changes in real yields. It will underperform if inflation is higher than expected, but I'm okay with that because it'll mean stocks are doing well.

Maybe real yields will get even more negative - but I have serious doubts about that beyond the short term. Both TMF and LTPZ currently have negative real expected returns over their effected durations, so the only way either will not be a drag on real returns in this portfolio is if rates go down further or inflation is less than expected (only TMF benefits from the latter).

I don't have any interested in going long on the breakeven rate - it's strongly positively correlated with equities (the RINF ETF tracks the breakeven rate if you want to look at backtests). To be an effective hedge an instrument needs to be negatively correlated.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by IRS-Gman »

To those on the original HFEA, has anyone considered revising the 55/45 UPRO/TMF allocation? HF revised the allocation one year ago from 40/60 to 55/45 after 30 yr treasury yields fell to 2.25%. The rationale was the insurance (TMF) was becoming more expensive.

Since August 2019, the 30 yr yield has fallen to 1.3%. Does another increase in the UPRO allocation make sense or stay the course with 55/45? Wish HF was still here to read his thoughts. What does the forum think?


HF August 11, 2019:
"If you are embarking on this strategy, you are basically betting that the S&P 500 will continue to be a significant driver of returns going forward. This is why you are levering up the index by 3x, and why the benchmark of the strategy is the S&P 500.

The inclusion of long Treasuries has always primarily been for stock crash insurance. The biggest risk of that insurance is a long term rise in long rates, but I have explained here and elsewhere why I do not consider this risk to be material, in the US, at this juncture.

So all that remains to be decided is how much gas we should throw on the fire (UPRO), and how much insurance we should take out (TMF).

When long interest rates are at 2% as they are now, the insurance tends to be rather costly, not because rates are more likely to rise from here - they are not. But rather because while we wait for the insurance to eventually pay out, its inclusion crowds out UPRO that could be generating serious returns."
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw »

How about UPRO/TMF/UGL/UTSL - 55/25/10/10
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

IRS-Gman wrote: Mon Aug 24, 2020 10:11 am To those on the original HFEA, has anyone considered revising the 55/45 UPRO/TMF allocation? HF revised the allocation one year ago from 40/60 to 55/45 after 30 yr treasury yields fell to 2.25%. The rationale was the insurance (TMF) was becoming more expensive.

Since August 2019, the 30 yr yield has fallen to 1.3%. Does another increase in the UPRO allocation make sense or stay the course with 55/45? Wish HF was still here to read his thoughts. What does the forum think?


HF August 11, 2019:
"If you are embarking on this strategy, you are basically betting that the S&P 500 will continue to be a significant driver of returns going forward. This is why you are levering up the index by 3x, and why the benchmark of the strategy is the S&P 500.

The inclusion of long Treasuries has always primarily been for stock crash insurance. The biggest risk of that insurance is a long term rise in long rates, but I have explained here and elsewhere why I do not consider this risk to be material, in the US, at this juncture.

So all that remains to be decided is how much gas we should throw on the fire (UPRO), and how much insurance we should take out (TMF).

When long interest rates are at 2% as they are now, the insurance tends to be rather costly, not because rates are more likely to rise from here - they are not. But rather because while we wait for the insurance to eventually pay out, its inclusion crowds out UPRO that could be generating serious returns."
This is a great question and something I’ve thought about a lot. Someone smarter than me will have to figure out what that looks like though because I can’t seem to make data support a conclusion for change.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by effigy98 »

VXX does work and what I am using, but you treat it like your home owners or car insurance... ya it looses value, but it is there to take on the jolts... and a little bit goes a very long way. With the massive uncertainty of the market in the coming months and the high CAPE, I am a bit overweight in VXX. I am ok paying a "fee" to reduce my max drawdown to make me stay sane in a market that can swing wildly like in March. Is there an alternative? Nothing else I could find offset a liquidity crunch like vol etfs.

Bigern tested this theory here: https://earlyretirementnow.com/2020/04/ ... k-in-2020/

I believe having a portion of gold (non leveraged) of at least 20% also helps reduce draw downs. This is a leveraged like portfolio mimicking the things I love about the PP or GB portfolios, but with higher upside potential.

Also, the debate about TMF and long bonds being bad... You are trading the dollar basically as they are usually pretty correlated. The fed is fighting massive deflation and with all the talk over inflation, deflation is probably the likely outcome unless they turn on full helicopter mode which they seem to be cutting back on. The other thing that would change my mind on deflation is a digital dollar and the elimination of cash.
Last edited by effigy98 on Mon Aug 24, 2020 12:42 pm, edited 2 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

effigy98 wrote: Mon Aug 24, 2020 12:20 pm VXX does work and what I am using, but you treat it like your home owners or car insurance... ya it looses value, but it is there to take on the jolts... and a little bit goes a very long way.

Bigern tested this theory here: https://earlyretirementnow.com/2020/04/ ... k-in-2020/
So what is your new allocation?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by effigy98 »

My two tax sheltered portfolios right now are:

ROTH
25 AAAU
28 UPRO
28 TMF
10 VXX
6 GBTC
3 CASH (Emergency fund)

401K
60 NTSX
8 TMF
24 PHYS
8 VXX

The ROTH is 1/4 of the value of the 401k as backdoor option was not available when I started the 401k. I now invest the max 57k between the two.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Mickelous »

Just put together a video presentation of this subject on YouTube if anyone is interested. I tried to find someone explaining the strategy in depth and couldn't really find anything at all, let alone anything decent. May not be perfect but it's what I was able to do in a single take without any editing.

https://youtu.be/jj1yBIOi5bE
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

Read this:
HEDGEFUNDIE wrote: So with this new data, I think the bottom line for the strategy is this:

If you believe we will ever return to the Federal Reserve interest rate regime of pre-1982, then you should probably not pursue this.

If, however, you believe that the Fed post-Volcker is a fundamentally different place, reliant on market forces to influence interest rates, then this strategy is a great way to get rich over the long term. Among the many academic articles written to support this view is this one:

https://www.nyu.edu/econ/user/gertlerm/qje00.pdf
Our estimates point to a significant difference in the way monetary policy was conducted pre- and post-late 1979. In the pre-Volcker years the Fed typically raised nominal rates by less than any increase in expected inflation, thus letting real short- term rates decline as anticipated inflation rose. On the other hand, during the Volcker-Greenspan era the Fed raised real as well as nominal short-term interest rates in response to higher expected inflation. Thus, our results lend quantitative support to the view that the anti-inflationary stance of the Fed has been stronger in the past two decades.
Now that all the data is in, who's in and who's out? And why?
Now, compare the information above with the following published earlier today: https://www.cnbc.com/2020/08/24/powell- ... ation.html
CNBC wrote: Fed Chairman Jerome Powell [will] speak Thursday during a virtual version of the Fed's annual Jackson Hole, Wyoming conference.
He is expected to outline what could be the central bank's most active efforts ever to spur inflation back to a healthy level.
"Average inflation" targeting means the Fed will allow inflation to run higher than normal for a period of time.
The effort will be the reverse of former Fed Chairman Paul Volcker's rate hikes instituted to quash inflation in the 1980s.
I'm very eager to see where this goes, but I'm staying the course for now.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Mickelous »

cos wrote: Mon Aug 24, 2020 5:09 pm Read this:
HEDGEFUNDIE wrote: So with this new data, I think the bottom line for the strategy is this:

If you believe we will ever return to the Federal Reserve interest rate regime of pre-1982, then you should probably not pursue this.

If, however, you believe that the Fed post-Volcker is a fundamentally different place, reliant on market forces to influence interest rates, then this strategy is a great way to get rich over the long term. Among the many academic articles written to support this view is this one:

https://www.nyu.edu/econ/user/gertlerm/qje00.pdf
Our estimates point to a significant difference in the way monetary policy was conducted pre- and post-late 1979. In the pre-Volcker years the Fed typically raised nominal rates by less than any increase in expected inflation, thus letting real short- term rates decline as anticipated inflation rose. On the other hand, during the Volcker-Greenspan era the Fed raised real as well as nominal short-term interest rates in response to higher expected inflation. Thus, our results lend quantitative support to the view that the anti-inflationary stance of the Fed has been stronger in the past two decades.
Now that all the data is in, who's in and who's out? And why?
Now, compare the information above with the following published earlier today: https://www.cnbc.com/2020/08/24/powell- ... ation.html
CNBC wrote: Fed Chairman Jerome Powell [will] speak Thursday during a virtual version of the Fed's annual Jackson Hole, Wyoming conference.
He is expected to outline what could be the central bank's most active efforts ever to spur inflation back to a healthy level.
"Average inflation" targeting means the Fed will allow inflation to run higher than normal for a period of time.
The effort will be the reverse of former Fed Chairman Paul Volcker's rate hikes instituted to quash inflation in the 1980s.
I'm very eager to see where this goes, but I'm staying the course for now.
Higher could be a target of 2.5 or 3%. News likes to be sensational.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

Mickelous wrote: Mon Aug 24, 2020 5:12 pm
cos wrote: Mon Aug 24, 2020 5:09 pm Read this:
HEDGEFUNDIE wrote: So with this new data, I think the bottom line for the strategy is this:

If you believe we will ever return to the Federal Reserve interest rate regime of pre-1982, then you should probably not pursue this.

If, however, you believe that the Fed post-Volcker is a fundamentally different place, reliant on market forces to influence interest rates, then this strategy is a great way to get rich over the long term. Among the many academic articles written to support this view is this one:

https://www.nyu.edu/econ/user/gertlerm/qje00.pdf
Our estimates point to a significant difference in the way monetary policy was conducted pre- and post-late 1979. In the pre-Volcker years the Fed typically raised nominal rates by less than any increase in expected inflation, thus letting real short- term rates decline as anticipated inflation rose. On the other hand, during the Volcker-Greenspan era the Fed raised real as well as nominal short-term interest rates in response to higher expected inflation. Thus, our results lend quantitative support to the view that the anti-inflationary stance of the Fed has been stronger in the past two decades.
Now that all the data is in, who's in and who's out? And why?
Now, compare the information above with the following published earlier today: https://www.cnbc.com/2020/08/24/powell- ... ation.html
CNBC wrote: Fed Chairman Jerome Powell [will] speak Thursday during a virtual version of the Fed's annual Jackson Hole, Wyoming conference.
He is expected to outline what could be the central bank's most active efforts ever to spur inflation back to a healthy level.
"Average inflation" targeting means the Fed will allow inflation to run higher than normal for a period of time.
The effort will be the reverse of former Fed Chairman Paul Volcker's rate hikes instituted to quash inflation in the 1980s.
I'm very eager to see where this goes, but I'm staying the course for now.
Higher could be a target of 2.5 or 3%. News likes to be sensational.
True, but I think the point was the Fed will likely do so by either further rate reductions (negative?), further bond buying, etc. those would be accommodative to the strategy and TMF
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nicolas Perrault »

wackerdr wrote: Mon Aug 17, 2020 11:29 am 5. Because of circuit breakers , it is not possible to lose entire balance in a single day.
Not probable, but likely not impossible. The NYSE level III breaker triggers when the S&P 500 drops 20% in value in one day. If the drops are continuous, the breakers would trigger before it drops 33% (-17%, -18%, -19%, -20% <-- breaker triggered). But if the drop is discontinuous, I assume the breaker could theoretically trigger at a lower level (-17%, -18%, -19%, -35% <-- breaker triggered). I'm not sure how likely this is in the real world though.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nicolas Perrault »

effigy98 wrote: Mon Aug 24, 2020 12:20 pm I am ok paying a "fee" to reduce my max drawdown to make me stay sane in a market that can swing wildly like in March. Is there an alternative? Nothing else I could find offset a liquidity crunch like vol etfs.
Yea they be called bonds, haven't you been paying attention? :D

I don't know of something that VXX can do that bonds can't do better. It's similar for your risk and far better for your returns to have 15% long bonds than 4% VXX. Just run an efficient frontier simulation in portfoliovisualizer. The long bond/SP500 portfolio dominates the VIX/SP500 portfolio (you can use VIXY instead of VXX). There's no risk-return combination for which the VIX/SP500 is more efficient than the long bond/SP500.

In plain English, there are far cheaper ways of paying that fee to reduce your max drawdown than going for short-term VIX futures.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Semantics wrote: Sun Aug 23, 2020 11:24 pm
taojaxx wrote: Thu Aug 20, 2020 10:11 pm
Semantics wrote: Wed Aug 19, 2020 11:16 pm
taojaxx wrote: Wed Aug 19, 2020 7:44 pm
Semantics wrote: Wed Aug 19, 2020 1:06 pm

The fact there is no cap with TIPS is a good point to consider, but presumably that can work against you just as easily as it can work in your favor. In a deflationary environment, there's no limit to how far LTPZ can fall.

The bolded part in particular is something I still have trouble grokking. True, there is no limit to the appreciation, but it does not follow from that that they are a better hedge against a crash. All crashes I'm aware of have been deflationary, so TIPS seems like the opposite of a hedge in that environment as it would in fact depreciate - assuming the crash is a surprise and the market hasn't priced it in. Based on my (often inadequate) understanding of macroeconomic theory, not backtests, I would expect TMF and leveraged LTPZ to have identical returns in the long run but the former to have a more negative correlation with UPRO and thus be a superior choice in HFEA.
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
Took me some time to wrap my head around that "short TIPS long TLT" thingy but I think I got it. It ends up being an (imperfect) protection against deflation, which is the least likely scenario as authorities will throw everything at it to avoid falling there: death spiral of higher real yields and lower cash flows.
Policy makers are much more likely to tolerate inflation -or, should they fail, stagflation so that's what the strategy should guard against, hence TIPS (and possibly gold). So the portfolio should be LONG the breakeven rate, rather than short as you advocate. So long TIPS short TLT would make more sense.
Just my $.02
This construction does guard against deflation, but that's not too important to me. The main properties I'm interested in are that a) it guards against lower than expected *in*flation (crash protection), and b) it is neutral to changes in real yields. It will underperform if inflation is higher than expected, but I'm okay with that because it'll mean stocks are doing well.

Maybe real yields will get even more negative - but I have serious doubts about that beyond the short term. Both TMF and LTPZ currently have negative real expected returns over their effected durations, so the only way either will not be a drag on real returns in this portfolio is if rates go down further or inflation is less than expected (only TMF benefits from the latter).

I don't have any interested in going long on the breakeven rate - it's strongly positively correlated with equities (the RINF ETF tracks the breakeven rate if you want to look at backtests). To be an effective hedge an instrument needs to be negatively correlated.
I totally understand where you're coming from. Here's a Fed paper essentially confirming this view.
https://www.federalreserve.gov/econres/ ... 190521.htm
But this all pre-dates bonds hitting the zero bound and the need for the Fed to fight recessions with more than rate cuts and QE. The response is coordination with fiscal policy, no pre-emptive tightening anymore, tolerating some inflation above 2% to make up for past undershooting. So, basically, managing real yields by modulating inflation. TIPS and gold are better suited to this world than TMF.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

Along the lines of the shift to 55/45, I’m seriously contemplating lowering TMF to 35 (UPRO at 65) given these low rates. Thoughts from the group?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Nicolas Perrault wrote: Mon Aug 24, 2020 10:01 pm Yea they be called bonds, haven't you been paying attention? :D

I don't know of something that VXX can do that bonds can't do better. It's similar for your risk and far better for your returns to have 15% long bonds than 4% VXX. Just run an efficient frontier simulation in portfoliovisualizer. The long bond/SP500 portfolio dominates the VIX/SP500 portfolio (you can use VIXY instead of VXX). There's no risk-return combination for which the VIX/SP500 is more efficient than the long bond/SP500.

In plain English, there are far cheaper ways of paying that fee to reduce your max drawdown than going for short-term VIX futures.
Volatility might be a better hedge than long term treasuries with interest rates so low. VXX makes a lot of sense to me if you are planning to run HF's strategy with more equities and fewer bonds. Something like 75/20/5 UPRO/TMF/VXX seems viable to me. When I backtest 75/25 vs. 75/20/5, I get better risk-adjusted returns and much lower drawdowns for the latter.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Tue Aug 25, 2020 8:03 am
Semantics wrote: Sun Aug 23, 2020 11:24 pm
taojaxx wrote: Thu Aug 20, 2020 10:11 pm
Semantics wrote: Wed Aug 19, 2020 11:16 pm
taojaxx wrote: Wed Aug 19, 2020 7:44 pm
TIPS come with a clause of minimal redemption value: they are redeemed at maturity at 100% nominal value -as a regular bond. So this offers (partial, not total) protection against deflation. It does not cover the premium paid above nominal, but it covers the nominal
True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
Took me some time to wrap my head around that "short TIPS long TLT" thingy but I think I got it. It ends up being an (imperfect) protection against deflation, which is the least likely scenario as authorities will throw everything at it to avoid falling there: death spiral of higher real yields and lower cash flows.
Policy makers are much more likely to tolerate inflation -or, should they fail, stagflation so that's what the strategy should guard against, hence TIPS (and possibly gold). So the portfolio should be LONG the breakeven rate, rather than short as you advocate. So long TIPS short TLT would make more sense.
Just my $.02
This construction does guard against deflation, but that's not too important to me. The main properties I'm interested in are that a) it guards against lower than expected *in*flation (crash protection), and b) it is neutral to changes in real yields. It will underperform if inflation is higher than expected, but I'm okay with that because it'll mean stocks are doing well.

Maybe real yields will get even more negative - but I have serious doubts about that beyond the short term. Both TMF and LTPZ currently have negative real expected returns over their effected durations, so the only way either will not be a drag on real returns in this portfolio is if rates go down further or inflation is less than expected (only TMF benefits from the latter).

I don't have any interested in going long on the breakeven rate - it's strongly positively correlated with equities (the RINF ETF tracks the breakeven rate if you want to look at backtests). To be an effective hedge an instrument needs to be negatively correlated.
I totally understand where you're coming from. Here's a Fed paper essentially confirming this view.
https://www.federalreserve.gov/econres/ ... 190521.htm
But this all pre-dates bonds hitting the zero bound and the need for the Fed to fight recessions with more than rate cuts and QE. The response is coordination with fiscal policy, no pre-emptive tightening anymore, tolerating some inflation above 2% to make up for past undershooting. So, basically, managing real yields by modulating inflation. TIPS and gold are better suited to this world than TMF.
Again, how can TIPS and be better suited to this world if they're going to decline relative to TMF when equities decline? The whole point of TMF in this portfolio is to be a hedge to UPRO. TIPS are poor for that purpose because they go down in an economic crash (relative to nominal treasuries). Your argument only makes sense to me if you are talking about TIPS as a standalone holding.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Thereum wrote: Tue Aug 25, 2020 3:46 pm
Volatility might be a better hedge than long term treasuries with interest rates so low. VXX makes a lot of sense to me if you are planning to run HF's strategy with more equities and fewer bonds. Something like 75/20/5 UPRO/TMF/VXX seems viable to me. When I backtest 75/25 vs. 75/20/5, I get better risk-adjusted returns and much lower drawdowns for the latter.
VXX only makes sense because it's only a year old and therefore a simple evaluation of how it moves is impossible. VIXY tracks the same index, works the same way, and lost 40% per year for 5 years. In 10 years VIXY lost 99.7% of its value. FWIW. You go ahead and hold VXX.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

Nicolas Perrault wrote: Sat Mar 14, 2020 3:14 am
market timer wrote: Sat Mar 14, 2020 1:56 am Your math works for a perpetual bond, but not a 30-year. The effect of an interest rate change on price is the bond's duration. The maximum duration of a 30-year bond is capped at 30 years (when the bond has no coupon). So a drop in yield from 0.01% to 0.005% results in a price increase of approximately 30 x 0.005%, or 0.15%.
We need High Quality Noncallable Perpetuals 3X. One can always dream
This is silly but...

What if you pooled folks... bought everyone's I-Bonds using leverage... Hahah.
Not that it's possible... but in a perfect world... would those serve the purpose?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Semantics wrote: Tue Aug 25, 2020 4:27 pm
taojaxx wrote: Tue Aug 25, 2020 8:03 am
Semantics wrote: Sun Aug 23, 2020 11:24 pm
taojaxx wrote: Thu Aug 20, 2020 10:11 pm
Semantics wrote: Wed Aug 19, 2020 11:16 pm

True, I don't worry about that case though, because the TIPS are 15+ years and if we were ever in a world where the market was pricing in zero inflation over the next 15+ years we'd probably have bigger problems to think about.

Was also just thinking, purely academically, if we are convinced yields won't go down in the long-term and want a hedge that doesn't vary with interest rates, we could use a long-short strategy of +TLT -LTPZ, which is basically the inverse of the breakeven rate. It's a more concentrated signal, so negative correlation to the market is quite strong, allowing one to allocate more of the portfolio to UPRO. This does better during the 2012-2018 period, but is rather difficult to implement in practice (ETFs have high borrowing rates and not enough leverage, so it would probably need to be done with futures or options; looks like there used to be an inverse-inflation ETF called TPS but that it's been discontinued).
Took me some time to wrap my head around that "short TIPS long TLT" thingy but I think I got it. It ends up being an (imperfect) protection against deflation, which is the least likely scenario as authorities will throw everything at it to avoid falling there: death spiral of higher real yields and lower cash flows.
Policy makers are much more likely to tolerate inflation -or, should they fail, stagflation so that's what the strategy should guard against, hence TIPS (and possibly gold). So the portfolio should be LONG the breakeven rate, rather than short as you advocate. So long TIPS short TLT would make more sense.
Just my $.02
This construction does guard against deflation, but that's not too important to me. The main properties I'm interested in are that a) it guards against lower than expected *in*flation (crash protection), and b) it is neutral to changes in real yields. It will underperform if inflation is higher than expected, but I'm okay with that because it'll mean stocks are doing well.

Maybe real yields will get even more negative - but I have serious doubts about that beyond the short term. Both TMF and LTPZ currently have negative real expected returns over their effected durations, so the only way either will not be a drag on real returns in this portfolio is if rates go down further or inflation is less than expected (only TMF benefits from the latter).

I don't have any interested in going long on the breakeven rate - it's strongly positively correlated with equities (the RINF ETF tracks the breakeven rate if you want to look at backtests). To be an effective hedge an instrument needs to be negatively correlated.
I totally understand where you're coming from. Here's a Fed paper essentially confirming this view.
https://www.federalreserve.gov/econres/ ... 190521.htm
But this all pre-dates bonds hitting the zero bound and the need for the Fed to fight recessions with more than rate cuts and QE. The response is coordination with fiscal policy, no pre-emptive tightening anymore, tolerating some inflation above 2% to make up for past undershooting. So, basically, managing real yields by modulating inflation. TIPS and gold are better suited to this world than TMF.
Again, how can TIPS and be better suited to this world if they're going to decline relative to TMF when equities decline? The whole point of TMF in this portfolio is to be a hedge to UPRO. TIPS are poor for that purpose because they go down in an economic crash (relative to nominal treasuries). Your argument only makes sense to me if you are talking about TIPS as a standalone holding.
OK, so here's more clarity (hopefully...):
TIPS declinED (past tense) vs TMF in the previous monetary regime because TMF was the go-to asset at crash time. In the forward looking situation, nominal bonds at the zero bound have exhausted appreciation potential. The Fed ran out of nominal yield cuts, so no TMF appreciation, The Fed alternative weapon to fight crashes is lower real yields, which they can only achieve through higher inflation (See discussion around inflation catch up -more on this hopefully in the Jackson Hole conference this week), hence TIPS/Gold appeal.
Again check Bridgewater's website for a nice explanation of what they call "Monetary Policy 3". If, as I believe, they're right, this is a game changer for the HFEA playbook.
Just my $.02. And Ray Dalio's as well, so that counts for something lol
langlands
Posts: 599
Joined: Wed Apr 03, 2019 10:05 pm

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

Post by langlands »

Right, taojaxx is basically talking about stagflation/hyperinflation which Semantics seems to discount as a remote possibility. In normal times, there is little inflation when the economy crashes. Who knows about the next time though. If stagflation/hyperinflation happens, the only winner might be TIPS/gold.
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