HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by taojaxx »

langlands wrote: Tue Aug 25, 2020 8:26 pm 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.
Right. Dalio's point is in normal time, the Fed fights crashes with rate cuts/bond purchases to lower nominal yields (so TMF benefits). Things have changed and the only way to fight crashes is lower REAL yields: there's no more room for lower nominal yields so lower real yields can only be achieved through higher inflation. So TIPS and gold survive or appreciate and TMF gets hammered.
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

taojaxx wrote: Tue Aug 25, 2020 9:20 pm
langlands wrote: Tue Aug 25, 2020 8:26 pm 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.
Right. Dalio's point is in normal time, the Fed fights crashes with rate cuts/bond purchases to lower nominal yields (so TMF benefits). Things have changed and the only way to fight crashes is lower REAL yields: there's no more room for lower nominal yields so lower real yields can only be achieved through higher inflation. So TIPS and gold survive or appreciate and TMF gets hammered.
Why not negative nominal rates?
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Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

firebirdparts wrote: Tue Aug 25, 2020 5:35 pm
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.
I backtested with VIXY instead of VXX...

Also, it seems you've missed a big theme here, which is combining negatively correlated assets and using leverage. VXX has a much stronger negative correlation with US equities than do US long term treasuries. Moreover, the negative correlation between equities and volatility can virtually guaranteed to continue into the future. The same cannot be said for the negative correlation between stocks and long term treasuries. There was never a guarantee of such a correlation -- even though it's a good bet -- and it's even more uncertain now with rates so low. We are in uncharted waters with yields; we are not with volatility.

Also, if you backtest 100% SPY vs 180% SPY 20% VIXY and -100% cash, you get better absolute and risk-adjusted returns with the leveraged portfolio. You could add even more leverage and still have a lower max drawdown. (Of course, you would have been better off holding US treasuries instead of volatility. There is no guarantee that will continue.)
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

taojaxx wrote: Tue Aug 25, 2020 9:20 pm
langlands wrote: Tue Aug 25, 2020 8:26 pm 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.
Right. Dalio's point is in normal time, the Fed fights crashes with rate cuts/bond purchases to lower nominal yields (so TMF benefits). Things have changed and the only way to fight crashes is lower REAL yields: there's no more room for lower nominal yields so lower real yields can only be achieved through higher inflation. So TIPS and gold survive or appreciate and TMF gets hammered.
I agree on the hyperinflation scenario, and langlands is right that I am more or less discounting it. It seems almost certain that globalization and tech will continue to be strong deflationary forces so it's just hard to see that scenario, I'd rather have the hedge that works better in a crash.

I don't know if it's true that there's no room for lower nominal yields. In a crash assets will flow to a safe asset and that's still going to be treasuries. If a deflationary environment persists for any length of time I assume there absolutely could be negative yielding LTTs - liquidity on 0% yielding LTTs would dry up because no one would want to sell them, so the government would presumably have to issue negative yielding ones. I've never studied or traded bonds directly, so this is just based on my intuitive understanding, I welcome any correction. I don't think this scenario is very likely, of course, but is it less likely than hyperinflation, considering we do see negative yields in other developed countries?
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Thereum wrote: Tue Aug 25, 2020 11:19 pm
firebirdparts wrote: Tue Aug 25, 2020 5:35 pm
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.
I backtested with VIXY instead of VXX...

Also, it seems you've missed a big theme here, which is combining negatively correlated assets and using leverage. VXX has a much stronger negative correlation with US equities than do US long term treasuries. Moreover, the negative correlation between equities and volatility can virtually guaranteed to continue into the future. The same cannot be said for the negative correlation between stocks and long term treasuries. There was never a guarantee of such a correlation -- even though it's a good bet -- and it's even more uncertain now with rates so low. We are in uncharted waters with yields; we are not with volatility.

Also, if you backtest 100% SPY vs 180% SPY 20% VIXY and -100% cash, you get better absolute and risk-adjusted returns with the leveraged portfolio. You could add even more leverage and still have a lower max drawdown. (Of course, you would have been better off holding US treasuries instead of volatility. There is no guarantee that will continue.)
Hobby horse time: BTAL is a long volatility ETF that doesn't suffer from futures roll decay because it's implemented using a long-short strategy of long low-beta stocks and short high-beta stocks. 70% UPRO + 180% BTAL backtests with almost the same Sharpe/Sortino as 55% UPRO + 45% TMF, from 2012-2020 (it outperforms during 2012-2018 where yields were lat). The disadvantages include the high ER, but that's already captured in the returns, and the borrowing fees, but even with the borrowing cost subtracted this still does better than the VIXY approach. It sure would be nice though if some enterprising ETF provider would offer a 3x equivalent to BTAL (hint hint) to make it much easier to run a UPRO/leveraged BTAL strategy. It does look like long UPRO - short TNA (3x Russell 2000) may be a way to synthesize leveraged BTAL, to the extent that 100% UPRO - 45% TNA looks quite a lot like 55% UPRO + 45% TMF when yields are flat, but it could be implemented a lot more efficiently at an institutional level.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by PicassoSparks »

Semantics wrote: Wed Aug 26, 2020 1:31 am It sure would be nice though if some enterprising ETF provider would offer a 3x equivalent to BTAL (hint hint) to make it much easier to run a UPRO/leveraged BTAL strategy.
I am trying to wrap my head around a 3x leveraged "stay flat" strategy.
IRS-Gman
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by IRS-Gman »

guyinlaw wrote: Mon Aug 24, 2020 11:03 am How about UPRO/TMF/UGL/UTSL - 55/25/10/10
Thanks for the feedback. Per PV, UGL and UTSL have stock market correlations of .06 and .57, respectively. TMF, on the other hand, has a correlation of -.48. For zig and zag purposes, it seems TMF is the better choice.

I'm wondering if a modest change from 55/45 to 60/40 might be worth considering until 30 yr yields crest 2% again.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

"Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

IRS-Gman wrote: Wed Aug 26, 2020 10:19 am
guyinlaw wrote: Mon Aug 24, 2020 11:03 am How about UPRO/TMF/UGL/UTSL - 55/25/10/10
Thanks for the feedback. Per PV, UGL and UTSL have stock market correlations of .06 and .57, respectively. TMF, on the other hand, has a correlation of -.48. For zig and zag purposes, it seems TMF is the better choice.

I'm wondering if a modest change from 55/45 to 60/40 might be worth considering until 30 yr yields crest 2% again.
This aligns with my thinking. It leaves enough “insurance” but lowers the cost of holding it
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guyinlaw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw »

IRS-Gman wrote: Wed Aug 26, 2020 10:19 am
guyinlaw wrote: Mon Aug 24, 2020 11:03 am How about UPRO/TMF/UGL/UTSL - 55/25/10/10
Thanks for the feedback. Per PV, UGL and UTSL have stock market correlations of .06 and .57, respectively. TMF, on the other hand, has a correlation of -.48. For zig and zag purposes, it seems TMF is the better choice.

I'm wondering if a modest change from 55/45 to 60/40 might be worth considering until 30 yr yields crest 2% again.
UPRO/TMF has worked so well because TMF has had a spectacular return, not just the negative correlation.

See the backtest of UPRO/TMF/UGL/UTSL approximation since 1986

https://www.portfoliovisualizer.com/bac ... on6_2=-200

Code: Select all

Portfolio	  	CAGR	
UPRO/TMF/UGL/UTSL  	22.38% 	
UPRO/TMF           	20.75% 
https://www.portfoliovisualizer.com/bac ... n10_2=22.5
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BayStater
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BayStater »

^ You used GOLD (Barrick Gold Mining Co.). Did you mean to use GLD (SPDR Gold Shares)?
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kerstverlichting
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kerstverlichting »

^ he also used XLU (1x) instead of UTSL (3x). Calculations involving UTSL would have to be simulated manually though, since it only goes back to 2017.
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

HFEA vs UPRO/4xBTAL 80/20 - nasty drawdown in March but otherwise stronger performance over the past decade, and the same CAGR - with zero treasuries. I just discovered how to replicate leverage using CASHX in PV... apologies if this is incorrect. Interestingly, you can't use negative CASHX in timed volatility models on PV. I wanted to see if I could lessen the drawdown using a TV strategy...

Image
cashmoney12399
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cashmoney12399 »

This may be a stupid question but I can't seem to figure it out. How do you guys rebalance in a cash account? You have to wait until the cash is settled from the sale proceeds before buying the underweight. This is a Roth IRA with Merrill. Am I correct in my thinking?
RomeoMustDie
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RomeoMustDie »

tomphilly wrote: Wed Aug 26, 2020 10:53 am "Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.

Someone already ran the VIXY experiment. It dampens volatility at a cost. Try a 5-15% allocation in backtest.

For the low interest rate inverted yield environment look at long term bond convexity and Hedgefundie's original post.
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

cashmoney12399 wrote: Thu Aug 27, 2020 10:10 am This may be a stupid question but I can't seem to figure it out. How do you guys rebalance in a cash account? You have to wait until the cash is settled from the sale proceeds before buying the underweight. This is a Roth IRA with Merrill. Am I correct in my thinking?
Most of us are doing this with a margin account at M1 Finance. The broker even provides a big, fancy rebalance button to automate the whole thing.

I'm not sure I would attempt this strategy without a margin account.
shoehead
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by shoehead »

Not sure if anyone has the seen the news yet, but the Fed seems to be reconfiguring itself again.

https://www.google.com/amp/s/m.economic ... 790838.cms

What does this mean for TMF?
Jags4186
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

shoehead wrote: Thu Aug 27, 2020 1:20 pm Not sure if anyone has the seen the news yet, but the Fed seems to be reconfiguring itself again.

https://www.google.com/amp/s/m.economic ... 790838.cms

What does this mean for TMF?
Right now it means nothing. The Fed has admitted defeat. They are unable to stoke inflation. Their announcement simply says that they will not respond with deflationary actions if and when inflationary trends begin to develop.
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Tinkerer-in-Chief
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tinkerer-in-Chief »

cashmoney12399 wrote: Thu Aug 27, 2020 10:10 am This may be a stupid question but I can't seem to figure it out. How do you guys rebalance in a cash account? You have to wait until the cash is settled from the sale proceeds before buying the underweight. This is a Roth IRA with Merrill. Am I correct in my thinking?
Hi cashmoney,

It is not a trading violation to purchase securities using unsettled funds. I do this in order to rebalance. It is, however, a trading violation to sell a security before the funds used to purchase it have settled. Unless Merrill is a very strict brokerage (I have never used them) you should be able to purchase the underweight the same day you sell the overweight.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

Meaty wrote: Tue Aug 25, 2020 3:17 pm 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?
I might consider an even 60/40 for nostalgia's sake (the non-leveraged 60/40 portfolio being such a champ for such a long time), but given Tyler's article over at Portfolio Charts about bond convexity I haven't lost faith in TMF's "insurance" capabilities. Besides, my window is very small in this strategy, and I don't see any reason for rates to unexpectedly rise in the next 15-20 years. (I can hardly see anything coming up in the next 15-20 years besides at least one of my kids probably going to college and getting married, so take my theories and advice with a giant grain of salt. :beer )
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

Texanbybirth wrote: Thu Aug 27, 2020 2:14 pm
Meaty wrote: Tue Aug 25, 2020 3:17 pm 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?
I might consider an even 60/40 for nostalgia's sake (the non-leveraged 60/40 portfolio being such a champ for such a long time), but given Tyler's article over at Portfolio Charts about bond convexity I haven't lost faith in TMF's "insurance" capabilities. Besides, my window is very small in this strategy, and I don't see any reason for rates to unexpectedly rise in the next 15-20 years. (I can hardly see anything coming up in the next 15-20 years besides at least one of my kids probably going to college and getting married, so take my theories and advice with a giant grain of salt. :beer )
Thanks. I agree and think the Fed announcement today has no impact either - other than asserting run away inflation won’t be a worry for this strategy in the near term (5ish years)
"Discipline equals Freedom" - Jocko Willink
Texanbybirth
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

Tinkerer-in-Chief wrote: Thu Aug 27, 2020 1:40 pm
cashmoney12399 wrote: Thu Aug 27, 2020 10:10 am This may be a stupid question but I can't seem to figure it out. How do you guys rebalance in a cash account? You have to wait until the cash is settled from the sale proceeds before buying the underweight. This is a Roth IRA with Merrill. Am I correct in my thinking?
Hi cashmoney,

It is not a trading violation to purchase securities using unsettled funds. I do this in order to rebalance. It is, however, a trading violation to sell a security before the funds used to purchase it have settled. Unless Merrill is a very strict brokerage (I have never used them) you should be able to purchase the underweight the same day you sell the overweight.
That's correct. All of my rebalancing for this strategy (at Fidelity) has been done same day. This is no different than manually rebalancing any other account/strategy you may have.
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
occambogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by occambogle »

Meaty wrote: Thu Aug 27, 2020 2:17 pm Thanks. I agree and think the Fed announcement today has no impact either - other than asserting run away inflation won’t be a worry for this strategy in the near term (5ish years)
My feeling is in agreement with this... but then why are yields up so strongly today and TMF is down 5% for the day?
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

occambogle wrote: Thu Aug 27, 2020 2:49 pm
Meaty wrote: Thu Aug 27, 2020 2:17 pm Thanks. I agree and think the Fed announcement today has no impact either - other than asserting run away inflation won’t be a worry for this strategy in the near term (5ish years)
My feeling is in agreement with this... but then why are yields up so strongly today and TMF is down 5% for the day?
I wish I knew 😀. One day movements are hard to understand and often, in my view, seem totally random
"Discipline equals Freedom" - Jocko Willink
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

Meaty wrote: Thu Aug 27, 2020 2:59 pm
occambogle wrote: Thu Aug 27, 2020 2:49 pm
Meaty wrote: Thu Aug 27, 2020 2:17 pm Thanks. I agree and think the Fed announcement today has no impact either - other than asserting run away inflation won’t be a worry for this strategy in the near term (5ish years)
My feeling is in agreement with this... but then why are yields up so strongly today and TMF is down 5% for the day?
I wish I knew 😀. One day movements are hard to understand and often, in my view, seem totally random
Actually, this is one of the few things about the market that does make sense to me. I believe long-term bonds frequently lose value when rates rise due to short-term bonds becoming more worthwhile. People sell LTTs and buy STTs due to the increased yield and lower risk of the latter relative to the former.

This works in the opposite direction, too. When people sell LTTs, rates rise. A $100 bond with a $1 dividend might drop in value to become a $50 bond with a $1 dividend, and in this scenario its yield has effectively increased from 1% to 2%. Seeing as the Fed hasn't implemented any rate hikes and the recent activity appears to be entirely market driven, I believe this is what happened today.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

occambogle wrote: Thu Aug 27, 2020 2:49 pm
Meaty wrote: Thu Aug 27, 2020 2:17 pm Thanks. I agree and think the Fed announcement today has no impact either - other than asserting run away inflation won’t be a worry for this strategy in the near term (5ish years)
My feeling is in agreement with this... but then why are yields up so strongly today and TMF is down 5% for the day?
TIPS yields were up just as strongly as LTT. The whole curve was up today, so I think it's just money moving to riskier assets (maybe treasury yields catching up a bit with recently soaring equities). If equity yields are higher than expected, cf. Salesforce earnings, bonds yields should go up too. Most likely had nothing to do with the Fed announcement, which contained no surprises. Maybe, as Meaty said, it was just random noise.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

tomphilly wrote: Wed Aug 26, 2020 10:53 am "Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Semantics wrote: Thu Aug 27, 2020 9:09 pm
tomphilly wrote: Wed Aug 26, 2020 10:53 am "Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
One benefit of the BTAL portfolio is that it has lower correlation to S&P 500 than UPRO/TMF.
Hobby horse time: BTAL is a long volatility ETF that doesn't suffer from futures roll decay because it's implemented using a long-short strategy of long low-beta stocks and short high-beta stocks. 70% UPRO + 180% BTAL backtests with almost the same Sharpe/Sortino as 55% UPRO + 45% TMF, from 2012-2020 (it outperforms during 2012-2018 where yields were lat). The disadvantages include the high ER, but that's already captured in the returns, and the borrowing fees, but even with the borrowing cost subtracted this still does better than the VIXY approach. It sure would be nice though if some enterprising ETF provider would offer a 3x equivalent to BTAL (hint hint) to make it much easier to run a UPRO/leveraged BTAL strategy. It does look like long UPRO - short TNA (3x Russell 2000) may be a way to synthesize leveraged BTAL, to the extent that 100% UPRO - 45% TNA looks quite a lot like 55% UPRO + 45% TMF when yields are flat, but it could be implemented a lot more efficiently at an institutional level.
Why is a long low beta, short high beta ETF long volatility? I assume BTAL is overall market neutral right (net beta = 0)?
Investing Lawyer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Investing Lawyer »

There is one volatility product that kinda works (i.e. hasn't lost >90% of its value over 10 years), XVZ. PF recently (or yahoo finance more likely) added the historical data. For those who care, it works because it shorts up to 30% of short term vix futures when contago is out of control like it is now. Unfortunately it is not super liquid, but hopefully we can change that.

Here is PF result for max sharpe with UPRO/TMF/XVZ:

https://www.portfoliovisualizer.com/opt ... ints=false
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

langlands wrote: Thu Aug 27, 2020 10:19 pm
Semantics wrote: Thu Aug 27, 2020 9:09 pm
tomphilly wrote: Wed Aug 26, 2020 10:53 am "Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
One benefit of the BTAL portfolio is that it has lower correlation to S&P 500 than UPRO/TMF.
Hobby horse time: BTAL is a long volatility ETF that doesn't suffer from futures roll decay because it's implemented using a long-short strategy of long low-beta stocks and short high-beta stocks. 70% UPRO + 180% BTAL backtests with almost the same Sharpe/Sortino as 55% UPRO + 45% TMF, from 2012-2020 (it outperforms during 2012-2018 where yields were lat). The disadvantages include the high ER, but that's already captured in the returns, and the borrowing fees, but even with the borrowing cost subtracted this still does better than the VIXY approach. It sure would be nice though if some enterprising ETF provider would offer a 3x equivalent to BTAL (hint hint) to make it much easier to run a UPRO/leveraged BTAL strategy. It does look like long UPRO - short TNA (3x Russell 2000) may be a way to synthesize leveraged BTAL, to the extent that 100% UPRO - 45% TNA looks quite a lot like 55% UPRO + 45% TMF when yields are flat, but it could be implemented a lot more efficiently at an institutional level.
Why is a long low beta, short high beta ETF long volatility? I assume BTAL is overall market neutral right (net beta = 0)?
Take a low beta position and subtract a high beta position and you've got overall negative beta, so it should move the opposite direction of the market.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Semantics wrote: Thu Aug 27, 2020 10:47 pm
langlands wrote: Thu Aug 27, 2020 10:19 pm
Semantics wrote: Thu Aug 27, 2020 9:09 pm
tomphilly wrote: Wed Aug 26, 2020 10:53 am "Fed Seen Holding Rates at Zero for Five Years in New Policy" - what does this mean for TMF?

I'm interested in BTAL too but it just doesn't have enough volatility to pair it with UPRO. You also can't trade futures in it.

Can anyone post a compelling portfolio visualizer that utilizes a VIX ticker?
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
One benefit of the BTAL portfolio is that it has lower correlation to S&P 500 than UPRO/TMF.
Hobby horse time: BTAL is a long volatility ETF that doesn't suffer from futures roll decay because it's implemented using a long-short strategy of long low-beta stocks and short high-beta stocks. 70% UPRO + 180% BTAL backtests with almost the same Sharpe/Sortino as 55% UPRO + 45% TMF, from 2012-2020 (it outperforms during 2012-2018 where yields were lat). The disadvantages include the high ER, but that's already captured in the returns, and the borrowing fees, but even with the borrowing cost subtracted this still does better than the VIXY approach. It sure would be nice though if some enterprising ETF provider would offer a 3x equivalent to BTAL (hint hint) to make it much easier to run a UPRO/leveraged BTAL strategy. It does look like long UPRO - short TNA (3x Russell 2000) may be a way to synthesize leveraged BTAL, to the extent that 100% UPRO - 45% TNA looks quite a lot like 55% UPRO + 45% TMF when yields are flat, but it could be implemented a lot more efficiently at an institutional level.
Why is a long low beta, short high beta ETF long volatility? I assume BTAL is overall market neutral right (net beta = 0)?
Take a low beta position and subtract a high beta position and you've got overall negative beta, so it should move the opposite direction of the market.
When I google the fund, I get AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL). It seems from the name that it's market neutral, so beta = 0. You don't have to take the same dollar value in low beta and high beta positions. If you have a higher low beta dollar value position, you can balance it out to get net 0 beta.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Actually, it seems you're right. I see the description:
The investment seeks performance results that correspond to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The fund invests at least 80% of its net assets in common stock of the long positions in the underlying index and sells short at least 80% of the short positions in the underlying index. The underlying index is a long/short market neutral index that is dollar-neutral. As such, it identifies long and short securities positions of approximately equal dollar amounts.
So it seems to be dollar-neutral (if I can believe that description) and therefore not actually market-neutral...terrible name.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RomeoMustDie »

Investing Lawyer wrote: Thu Aug 27, 2020 10:31 pm There is one volatility product that kinda works (i.e. hasn't lost >90% of its value over 10 years), XVZ. PF recently (or yahoo finance more likely) added the historical data. For those who care, it works because it shorts up to 30% of short term vix futures when contago is out of control like it is now. Unfortunately it is not super liquid, but hopefully we can change that.

Here is PF result for max sharpe with UPRO/TMF/XVZ:

https://www.portfoliovisualizer.com/opt ... ints=false
The VIXY portfolio "worked" but it obviously has lower returns since it is a hedging strategy.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Semantics wrote: Thu Aug 27, 2020 9:09 pm
tomphilly wrote: Wed Aug 26, 2020 10:53 am
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
Thank you. With UPRO at 70%, does 180% BTAL represent 30% BTAL at 6x leverage?

On a practical level, how do you hold 180% BTAL? Say you have $10,000 - 7k goes into UPRO, and then 3*6=18k goes into BTAL, correct? Do you borrow 3*5=15k for the extra BTAL? You essentially need a 150% margin allowance or borrowing power to do this, unless I'm missing something, I'm not a math/finance guy.

I'm guessing the short answer is it's currently not practical/possible to do this and we need to wait for a 3x BTAL ticker or BTAL futures.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta and then purchase another expensive leveraged fund to bring up the market beta. The fund combination that's suggested barely has a market beta above 1. If you want both positive market beta and BAB, start with a long-only fund.

There are very few things you can do with 10 years of history and estimating future returns with a backtest is not one of them. Maybe try some actual portfolio optimization techniques: viewtopic.php?f=10&t=322366
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

tomphilly wrote: Fri Aug 28, 2020 7:08 am
Semantics wrote: Thu Aug 27, 2020 9:09 pm
tomphilly wrote: Wed Aug 26, 2020 10:53 am
Semantics wrote: Wed Aug 26, 2020 1:31 am 70% UPRO + 180% BTAL backtests
Can you please post a PV link to this? I'm very interested.
Here it is. Worth noting that it actually lags UPRO/TMF quite a bit until 2018. I'm not optimistic about this outperforming TMF if yields stay flat, but I like it more than any of the VIX derivatives that exist. Seems like essentially a better way of tracking volatility.

https://www.portfoliovisualizer.com/bac ... on4_1=-150
Thank you. With UPRO at 70%, does 180% BTAL represent 30% BTAL at 6x leverage?

On a practical level, how do you hold 180% BTAL? Say you have $10,000 - 7k goes into UPRO, and then 3*6=18k goes into BTAL, correct? Do you borrow 3*5=15k for the extra BTAL? You essentially need a 150% margin allowance or borrowing power to do this, unless I'm missing something, I'm not a math/finance guy.

I'm guessing the short answer is it's currently not practical/possible to do this and we need to wait for a 3x BTAL ticker or BTAL futures.
Which makes it sort of a non-starter if currently using HFEA in tax advantaged accounts since margin generally isnt an option.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta and then purchase another expensive leveraged fund to bring up the market beta. The fund combination that's suggested barely has a market beta above 1. If you want both positive market beta and BAB, start with a long-only fund.

There are very few things you can do with 10 years of history and estimating future returns with a backtest is not one of them. Maybe try some actual portfolio optimization techniques: viewtopic.php?f=10&t=322366
So what's your suggestion?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta...
I agree - for a buy-and-hold re-balancing strategy at least - but BTAL is performant in a target volatility model as an out-of-market asset. It performs slightly better than holding cash in my tests - nothing to get excited about, but still worth playing with.

I think the point is that BTAL is "interesting" and has some of the qualities of a "TMF alternative" some are seeking (myself included), but it's not viable as a leveraged volatility hedge in its current form.

Can we start a 3xBTAL petition and send it to iShares? :P
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

Semantics wrote: Fri Aug 28, 2020 10:20 am
Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta and then purchase another expensive leveraged fund to bring up the market beta. The fund combination that's suggested barely has a market beta above 1. If you want both positive market beta and BAB, start with a long-only fund.

There are very few things you can do with 10 years of history and estimating future returns with a backtest is not one of them. Maybe try some actual portfolio optimization techniques: viewtopic.php?f=10&t=322366
So what's your suggestion?
I don't know. Most users pick Fama/French factors, the AQR and AA factor set that includes BAB seems less popular. If you really want to use BAB instead of Fama/French factors, maybe use SMMV (iShares MSCI USA Sm-Cp Min Vol Fctr ETF) or VFMV (Vanguard U.S. Minimum Volatility ETF). You'll want something from a reputable provider, with low cost and a high high R^2.

But you should make that decision based on the available academic evidence. For example see http://pages.stern.nyu.edu/~lpederse/pa ... stBeta.pdf and/or read a few more papers so you can compare the strength of the evidence with Fama/French factors. Backtests are woefully inadequate tools for this situation.
tomphilly wrote: Fri Aug 28, 2020 11:48 am
Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta...
I agree - for a buy-and-hold re-balancing strategy at least - but BTAL is performant in a target volatility model as an out-of-market asset. It performs slightly better than holding cash in my tests - nothing to get excited about, but still worth playing with.

I think the point is that BTAL is "interesting" and has some of the qualities of a "TMF alternative" some are seeking (myself included), but it's not viable as a leveraged volatility hedge in its current form.

Can we start a 3xBTAL petition and send it to iShares? :P
Whether you use BTAL in a buy and hold setting or a target volatility setting is irrelevant, in both cases the factor exposure of the total portfolio determines the expected performance. There are much cheaper ways to obtain the same factor exposure than with these two funds.

FWIW I evaluated target volatility with mathematical analysis and found that it doesn't make any sense (the math works under the assumption that return is proportional to volatility, but statistical tests easily prove this assumption to be false). I also evaluated target volatility using an out-of-sample analysis and found that optimally chosen target volatility between stocks and bonds results in lower expected utility than a constant allocation (out of sample) between 1940 and 2020. Portfolio visualizer does not offer tools that can be used to evaluate these strategies correctly.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Uncorrelated wrote: Fri Aug 28, 2020 1:44 pm
Semantics wrote: Fri Aug 28, 2020 10:20 am
Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta and then purchase another expensive leveraged fund to bring up the market beta. The fund combination that's suggested barely has a market beta above 1. If you want both positive market beta and BAB, start with a long-only fund.

There are very few things you can do with 10 years of history and estimating future returns with a backtest is not one of them. Maybe try some actual portfolio optimization techniques: viewtopic.php?f=10&t=322366
So what's your suggestion?
I don't know. Most users pick Fama/French factors, the AQR and AA factor set that includes BAB seems less popular. If you really want to use BAB instead of Fama/French factors, maybe use SMMV (iShares MSCI USA Sm-Cp Min Vol Fctr ETF) or VFMV (Vanguard U.S. Minimum Volatility ETF). You'll want something from a reputable provider, with low cost and a high high R^2.
Thanks for the suggestions, these ETFs look like they have good theoretical merit, however their performance has been poor lately and they likely won't have good results until small cap value starts to perform again. I've previously thought about leveraging USMV, which seems similar to your suggestions but excludes small cap, which is presumably why it has been performing better, but continue to stick to LETFs for now for simplicity.

But the interesting thing is simple 60/40 S&P 500/BTAL has still handily outperformed all of these in PV in terms of Sharpe (it has also beaten 60/40 S&P 500/BND). Maybe that won't continue, I don't know enough about the theoretical underpinnings. Is it just luck? Do they execute better in their BAB implementation? I'm thinking it's perhaps that this strategy captures a momentum effect due to only rebalancing and harvesting the BAB factor+cash monthly/quarterly, vs. 100% long low-vol stock capturing it in real time. In other words the periodic rebalancing allows intervals of increased exposure to the side that's performing well and decreased exposure to the underperforming side.
But you should make that decision based on the available academic evidence. For example see http://pages.stern.nyu.edu/~lpederse/pa ... stBeta.pdf and/or read a few more papers so you can compare the strength of the evidence with Fama/French factors. Backtests are woefully inadequate tools for this situation.
Academic evidence is important to me, and these papers are helpful. But I am cautious about using academic evidence as my only consideration, I've seen a fair amount of finance literature that does use backtests; they have much more extensive data than Portfolio Visualizer, but on the other hand many of the historical conditions were vastly different than what we see today or are likely to see going forward. There are also a lot of assumptions made in academic papers, which I see a lot in my own field as well. It may not be straightforward to implement the ideal theoretical approach in practice. I have to consider what tools are available to me as a retail investor and how much I can do without compromising my other time commitments.
Uncorrelated wrote: Fri Aug 28, 2020 1:44 pm
tomphilly wrote: Fri Aug 28, 2020 11:48 am
Uncorrelated wrote: Fri Aug 28, 2020 8:16 am BTAL has a negative market beta of -0.47: https://www.portfoliovisualizer.com/fac ... sion=false (95% CI -0.597...-0.337)

It makes no sense to purchase an expensive fund with a negative market beta...
I agree - for a buy-and-hold re-balancing strategy at least - but BTAL is performant in a target volatility model as an out-of-market asset. It performs slightly better than holding cash in my tests - nothing to get excited about, but still worth playing with.

I think the point is that BTAL is "interesting" and has some of the qualities of a "TMF alternative" some are seeking (myself included), but it's not viable as a leveraged volatility hedge in its current form.

Can we start a 3xBTAL petition and send it to iShares? :P
Whether you use BTAL in a buy and hold setting or a target volatility setting is irrelevant, in both cases the factor exposure of the total portfolio determines the expected performance. There are much cheaper ways to obtain the same factor exposure than with these two funds.

FWIW I evaluated target volatility with mathematical analysis and found that it doesn't make any sense (the math works under the assumption that return is proportional to volatility, but statistical tests easily prove this assumption to be false). I also evaluated target volatility using an out-of-sample analysis and found that optimally chosen target volatility between stocks and bonds results in lower expected utility than a constant allocation (out of sample) between 1940 and 2020. Portfolio visualizer does not offer tools that can be used to evaluate these strategies correctly.
By "target volatility between stocks and bonds", do you mean setting a target volatility on stocks and using bonds as the out-of-market asset? Or are you using a stocks+bonds portfolio and cash as out-of-market asset? (Or something else?) Intuitively it makes sense to me that you'd get lower utility with the former, since stocks and bonds were positively correlated for the majority of the 1940-2020 period.

Isn't reason people are using target volatility just to get out of UPRO during what would be catastrophic market declines? Otherwise we'd just all go 100% UPRO all the time, that's pretty obvious. I doubt that anyone in here is expecting that they'll get similar returns every month by matching the target volatility or that increasing the UPRO allocation in low-volatility times will increase the returns to match.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

By "target volatility between stocks and bonds", do you mean setting a target volatility on stocks and using bonds as the out-of-market asset? Or are you using a stocks+bonds portfolio and cash as out-of-market asset? (Or something else?) Intuitively it makes sense to me that you'd get lower utility with the former, since stocks and bonds were positively correlated for the majority of the 1940-2020 period.
Where do you see this positive correlation between stocks and bonds from 1940-2020? Are you talking about 2000-2020? Or am I seeing the wrong thing in their first graph?
https://faculty.mccombs.utexas.edu/keit ... n-9.14.pdf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Uncorrelated wrote: Fri Aug 28, 2020 1:44 pm FWIW I evaluated target volatility with mathematical analysis and found that it doesn't make any sense (the math works under the assumption that return is proportional to volatility, but statistical tests easily prove this assumption to be false). I also evaluated target volatility using an out-of-sample analysis and found that optimally chosen target volatility between stocks and bonds results in lower expected utility than a constant allocation (out of sample) between 1940 and 2020. Portfolio visualizer does not offer tools that can be used to evaluate these strategies correctly.
Is portfolio visualizer's implementation of target volatility flawed? I'm not mathematically minded enough to understand half the things you said - but some faith in backtesting is the underpinning of this entire thread, and as others have said, as a retail investor with limited time (and limited brain power), I have to make an assessment with the tools available - in this case Portfolio Visualizer.

My attraction to target volatility is it removes an arbitrary component of the original strategy - quarterly re-balancing - and replaces it with an objective trade signal. Someone smarter than me earlier in this thread explained that to make any strategy "better" one must find and replace its arbitrary components with justifiable ones. That makes sense to me. My other attraction to target volatility is it allows reduced exposure to TMF (which many are nervous about) without hurting returns (again, only on a 10 year backtest).

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

Post by TechBogler »

http://www.ddnum.com/articles/leveragedETFs.php

Image

what are people's thought on 27% UPRO 27% TQQQ 46% TMF vs. a 2x levered equivalent basket, given the above indicates 2x market returns are most optimal?
Last edited by TechBogler on Sat Aug 29, 2020 2:18 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AnilG »

I read most of both threads but I don't understand reasoning behind combining highly correlated UPRO and TQQQ and then allocating larger portion to higher risk LETFs. Such allocation ignores any concept of risk parity.

If you want 2x leverage why not just go with 2x LETFs? You will have lower volatility decay, lower drawdowns, and lower cost of leverage compared to 3x LETFs.

Sorry, I haven't participated in this discussion, I apologize if I missed something.
BogleMeshuggeneh wrote: Sat Aug 29, 2020 2:16 am http://www.ddnum.com/articles/leveragedETFs.php

Image

what are people's thought on 27% UPRO 27% TQQQ 46% TMF vs. a 2x levered equivalent basket, given the above indicates 2x market returns are most optimal?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

Semantics wrote: Fri Aug 28, 2020 8:34 pm Thanks for the suggestions, these ETFs look like they have good theoretical merit, however their performance has been poor lately and they likely won't have good results until small cap value starts to perform again. I've previously thought about leveraging USMV, which seems similar to your suggestions but excludes small cap, which is presumably why it has been performing better, but continue to stick to LETFs for now for simplicity.

But the interesting thing is simple 60/40 S&P 500/BTAL has still handily outperformed all of these in PV in terms of Sharpe (it has also beaten 60/40 S&P 500/BND). Maybe that won't continue, I don't know enough about the theoretical underpinnings. Is it just luck? Do they execute better in their BAB implementation? I'm thinking it's perhaps that this strategy captures a momentum effect due to only rebalancing and harvesting the BAB factor+cash monthly/quarterly, vs. 100% long low-vol stock capturing it in real time. In other words the periodic rebalancing allows intervals of increased exposure to the side that's performing well and decreased exposure to the underperforming side.
Higher sharpe does not imply it's better choice.

Since neither BTAL nor popular value ETF's have a statistically significant positive alpha and the difference between BAB expected return and value expected return is small, the only valid explanation is that it was luck. If the rebalancing interval mattered, then that was also pure luck. The momentum exposure of BTAL is positive but only if you don't correct for value exposure, so it's unlikely the momentum exposure will explain a significant part of future expected return.

If you look at the performance attribution tab in this very quick factor regression with BTAL and UPRO, you'll see that the market factor and BAB were responsible for about half of the return each (26 and 32 bps monthly). if you compare the performance to historical factor results, you'll see that market returns during this time period were approx 2.5x as large as the historical average and BAB between 2x and 4x as large.

It's clear why backtesting doesn't work: If you run a backtest, you implicitly assume that the mean return and correlations in the backtest period (in this case, 2011-2020) is a better estimate of future return than the BAB paper I linked (1926-2012). Clearly an absurd assumption.

I personally have never seen a decent paper where backtests formed an integral part of the evidence. Usually, it's trivial to show that their solution is suboptimal and/or results are not robust meaning attempts to reproduce the results under slightly different circumstances fail.
By "target volatility between stocks and bonds", do you mean setting a target volatility on stocks and using bonds as the out-of-market asset? Or are you using a stocks+bonds portfolio and cash as out-of-market asset? (Or something else?) Intuitively it makes sense to me that you'd get lower utility with the former, since stocks and bonds were positively correlated for the majority of the 1940-2020 period.

Isn't reason people are using target volatility just to get out of UPRO during what would be catastrophic market declines? Otherwise we'd just all go 100% UPRO all the time, that's pretty obvious. I doubt that anyone in here is expecting that they'll get similar returns every month by matching the target volatility or that increasing the UPRO allocation in low-volatility times will increase the returns to match.
I used stocks and t-bills, the correlation isn't relevant for this analysis. The question was whether it is possible to obtain alpha on the stock market with simple volatility techniques and the answer was no. Maybe it is possible to beat the bond market, but since we have not seen a bond bear market in 40 years it would not be wise to draw conclusions based on recent bond market data.

The theoretical underpinnings for target volatility (if you can find what they are...), are trivially proven to be false. There is no clear evidence it improves the distribution of outcomes. In my tests I saw a large decrease in out-of-sample utility with various implementations.

Target variance does have theoretical underpinnings* when performed on stocks (I did not investigate bonds). According to my tests very complicated multi-period volatility forecasting and transaction-cost aware trading techniques are required in order to beat a constant allocation out-of-sample. Even with those techniques I'm not sure how the evidence stacks up compared to value or BAB, which are also much simpler to implement.

*(Target variance is just Merton's portfolio problem where the volatility estimate is adjusted every month. It doesn't get much more fundamental than that.)
tomphilly wrote: Fri Aug 28, 2020 10:06 pm
Uncorrelated wrote: Fri Aug 28, 2020 1:44 pm FWIW I evaluated target volatility with mathematical analysis and found that it doesn't make any sense (the math works under the assumption that return is proportional to volatility, but statistical tests easily prove this assumption to be false). I also evaluated target volatility using an out-of-sample analysis and found that optimally chosen target volatility between stocks and bonds results in lower expected utility than a constant allocation (out of sample) between 1940 and 2020. Portfolio visualizer does not offer tools that can be used to evaluate these strategies correctly.
Is portfolio visualizer's implementation of target volatility flawed? I'm not mathematically minded enough to understand half the things you said - but some faith in backtesting is the underpinning of this entire thread, and as others have said, as a retail investor with limited time (and limited brain power), I have to make an assessment with the tools available - in this case Portfolio Visualizer.

My attraction to target volatility is it removes an arbitrary component of the original strategy - quarterly re-balancing - and replaces it with an objective trade signal. Someone smarter than me earlier in this thread explained that to make any strategy "better" one must find and replace its arbitrary components with justifiable ones. That makes sense to me. My other attraction to target volatility is it allows reduced exposure to TMF (which many are nervous about) without hurting returns (again, only on a 10 year backtest).

Image
It's not that PV's implementation of target volatility is flawed, it's that target volatility itself is fundamentally flawed and backtests are incredibly difficult to work with.

Target volatility is optimal under the assumption (among others) that expected return is proportional to expected volatility, but you can observe in many papers that this relation does not hold. For example, I opened a random paper (literally the first google hit) and found this:
Image
If returns were proportional to expected volatility, then the return in the high volatility months should be 4 times as high as in the low volatility months. In reality, the difference is a rounding error.

If you want to have as little arbitrary assumptions as possible, throwing away target volatility and HFEA is probably the first thing you should do. There are certain assumptions that lead to target volatility, those assumptions are false (see above). There are certain assumptions that lead to a strategy similar to HFEA, but it is very unlikely those assumptions are right for you.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kerstverlichting »

BogleMeshuggeneh wrote: Sat Aug 29, 2020 2:16 am http://www.ddnum.com/articles/leveragedETFs.php

Image

what are people's thought on 27% UPRO 27% TQQQ 46% TMF vs. a 2x levered equivalent basket, given the above indicates 2x market returns are most optimal?
I have considered 2x leverage, but from what I remember nowadays 3x is optimal for most indexes.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

The optimal leverage depends on your risk aversion. If you have a logarithmic utility function, then the optimal leverage for equities is around 2x. If you are optimizing for max expected return, then there no upper bound for the optimal leverage. Most users don't have a log utility function, which makes optimizing for higher CAGR meaningless. (optimizing for CAGR is equivalent to optimizing for log wealth).
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

parval wrote: Fri Aug 28, 2020 9:51 pm
By "target volatility between stocks and bonds", do you mean setting a target volatility on stocks and using bonds as the out-of-market asset? Or are you using a stocks+bonds portfolio and cash as out-of-market asset? (Or something else?) Intuitively it makes sense to me that you'd get lower utility with the former, since stocks and bonds were positively correlated for the majority of the 1940-2020 period.
Where do you see this positive correlation between stocks and bonds from 1940-2020? Are you talking about 2000-2020? Or am I seeing the wrong thing in their first graph?
https://faculty.mccombs.utexas.edu/keit ... n-9.14.pdf
Are you talking about yield, or valuations? From the conclusions section:
The stock-bond yield correlation has been positive for an extended period over the past 15 years, in contrast to the negative correlation observed throughout much of the 20th century.
i.e. stock and bond prices were often positively correlated in the past. I can't see the images in the PDF you linked, as only the Google cached version would load, but here's what I mean:

Image
hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 »

Uncorrelated wrote: Sat Aug 29, 2020 4:55 am

If you want to have as little arbitrary assumptions as possible, throwing away target volatility and HFEA is probably the first thing you should do. There are certain assumptions that lead to target volatility, those assumptions are false (see above). There are certain assumptions that lead to a strategy similar to HFEA, but it is very unlikely those assumptions are right for you.
Maybe I'm misunderstanding something (and I admit I'm not understanding half of what you are talking about re utility function, etc.) but I though TV is exactly what's writing on the box: how much volatility you want to accept (read: you're able to stomach)? I never saw it from the max return perspective...

I'm in for a TV of 25% but after this recent downturn I guess I'm able to stomach much more volatility (I've also got experience with dabbling in crypto trading, so volatility doesn't bother me so much (in the long run)).
I won't change my strategy or target volatility yet, though... PV says 80% UPRO/20% TMF for the next month.
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

hilink73 wrote: Sun Aug 30, 2020 1:10 pm
Uncorrelated wrote: Sat Aug 29, 2020 4:55 am

If you want to have as little arbitrary assumptions as possible, throwing away target volatility and HFEA is probably the first thing you should do. There are certain assumptions that lead to target volatility, those assumptions are false (see above). There are certain assumptions that lead to a strategy similar to HFEA, but it is very unlikely those assumptions are right for you.
Maybe I'm misunderstanding something (and I admit I'm not understanding half of what you are talking about re utility function, etc.) but I though TV is exactly what's writing on the box: how much volatility you want to accept (read: you're able to stomach)? I never saw it from the max return perspective...

I'm in for a TV of 25% but after this recent downturn I guess I'm able to stomach much more volatility (I've also got experience with dabbling in crypto trading, so volatility doesn't bother me so much (in the long run)).
I won't change my strategy or target volatility yet, though... PV says 80% UPRO/20% TMF for the next month.
The problem is that TV is not mean-variance optimal. That means there are other strategies that have the same risk as TV, but a higher expected return.

There are two conditions that need to be met before TV becomes optimal: recent volatility is the best possible estimate of future volatility, return is proportional to volatility. Both assumptions are clearly false. If you want to take less risk, TV or other market timing approaches are not the answer, the answer is to use a lower equity allocation.
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