HEDGEFUNDIE's excellent adventure Part II: The next journey

[privatefarmer]

It’s like when I hear ppl talk about social security “going broke”. That is delusional. OF COURSE SS would never go broke, in fact the benefits will never decrease but will only increase. The reason being is that congress would NEVER allow their largest voting class (seniors) to lose their bennies. They’ll simply increase our deficit to continue paying SS and if anything would increase benefits over time. Again, this is only a problem if inflation is out of control. Otherwise, it stimulates the economy by getting more money into consumers’ hands.

[LadyGeek]

The thread is getting derailed on economic policy (off-topic). As a reminder, see: Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

Also, conjecture on the future of Social Security is off-topic. Changing Social Security requires changes in US law - a political process. From: Political comments and proposed tax plan remain off-topic

Speculation about future legislation is prohibited by forum policy, see Unacceptable Topics:

Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:

• Common religious expressions such as sending your prayers to an ailing member.
• Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
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• Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.

This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed legislation changes many times between the time it's introduced and signed into law.

Planning for a reduction in benefits is OK (how much to reduce), but conjecture on future benefits (or political comments) is off-topic.

Please stay on-topic.

[worthit]

^^^ We posted at the same time, but I would have recommended that you don't download the file.

Never give an unknown site your email. File hosting sites can include unwanted software that show up with your download. If you've downloaded the file, run a malware check.

Thank you, Lady Geek for the caution. Luckily, I didn't have to provide my email.

[Saaybogle]

Good news for those of us with high TMF allocations. Looks like we shouldn't have to worry about rate hikes until at least 2023.

Again, I'd like to remind everyone that this is a very long-term strategy on the order of decades, and it's silly to focus on time periods as short as 3 years. However, this bodes well for anyone looking to get started in the next 3 years as they're less likely to face any serious headwinds on the bond side.

Back when I was running simulations, the majority of worst case scenarios seemed to result from low or negative returns in the first few years. The opposite was also true with the best outcomes manifesting after strong starts. This strategy is frighteningly start-date-sensitive.

So, here's hoping that rates really stay low and that the bull rages on!

Cos, do you use the original 40/60 UPRO:TMF allocation? You mention being high TMF. Thanks.

[Meaty]

Good news for those of us with high TMF allocations. Looks like we shouldn't have to worry about rate hikes until at least 2023.

Again, I'd like to remind everyone that this is a very long-term strategy on the order of decades, and it's silly to focus on time periods as short as 3 years. However, this bodes well for anyone looking to get started in the next 3 years as they're less likely to face any serious headwinds on the bond side.

Back when I was running simulations, the majority of worst case scenarios seemed to result from low or negative returns in the first few years. The opposite was also true with the best outcomes manifesting after strong starts. This strategy is frighteningly start-date-sensitive.

So, here's hoping that rates really stay low and that the bull rages on!

Cos, do you use the original 40/60 UPRO:TMF allocation? You mention being high TMF. Thanks.

I can’t speak for Cos, but 40% TMF feels high to me right now. HF himself moved from 40/60 to 55/45 when long term treasuries hit 2%. The cost of the “insurance” just got too high. Using that same logic, I’ve moved to 60 UPRO / 40 TMF given where rates are. This might be a dumb move

[Mickelous]

Good news for those of us with high TMF allocations. Looks like we shouldn't have to worry about rate hikes until at least 2023.

Again, I'd like to remind everyone that this is a very long-term strategy on the order of decades, and it's silly to focus on time periods as short as 3 years. However, this bodes well for anyone looking to get started in the next 3 years as they're less likely to face any serious headwinds on the bond side.

Back when I was running simulations, the majority of worst case scenarios seemed to result from low or negative returns in the first few years. The opposite was also true with the best outcomes manifesting after strong starts. This strategy is frighteningly start-date-sensitive.

So, here's hoping that rates really stay low and that the bull rages on!

Cos, do you use the original 40/60 UPRO:TMF allocation? You mention being high TMF. Thanks.

I can’t speak for Cos, but 40% TMF feels high to me right now. HF himself moved from 40/60 to 55/45 when long term treasuries hit 2%. The cost of the “insurance” just got too high. Using that same logic, I’ve moved to 60 UPRO / 40 TMF given where rates are. This might be a dumb move

Maybe add a 5 percent volatility hedge or gold hedge for that last 5 percent change instead?

[Thereum]

This strategy has gotten crushed recently and it's only going to continue IMO. Investors aren't eager to rush into bonds during crashes when the 10 year is yielding 0.69%. Meanwhile, the leveraged 3x ETFs will continue to suffer from volatility decay. I think you are better off seeking leverage through long term index call options.

[BogleBobby]

This strategy has underperformed for a few weeks. Don't read too much into it.

[Mickelous]

This strategy has underperformed for a few weeks. Don't read too much into it.

There are whole years where the strategy lost 10-15 percent. I'm still up 15% for the 5 months I've been it.

[Meaty]

This strategy has underperformed for a few weeks. Don't read too much into it.

There are whole years where the strategy lost 10-15 percent. I'm still up 15% for the 5 months I've been it.

There are whole years the S&P has lost even more. I’m down 2% this week, 5% this month, UP 11% this quarter, and 40% in the last 12 months - all of which is highly start date dependent.

This strategy isn’t guaranteed to go straight up (or up at all) but neither is traditional index investing

[perfectuncertainty]

This strategy has gotten crushed recently and it's only going to continue IMO. Investors aren't eager to rush into bonds during crashes when the 10 year is yielding 0.69%. Meanwhile, the leveraged 3x ETFs will continue to suffer from volatility decay. I think you are better off seeking leverage through long term index call options.

Be careful of recency bias.

There have been some tough days for the strategy. For instance, if you had held 55/45 UPRO/TMF:

3/11/20 the strategy was down 13.08% for the day
3/12/20 the strategy was down 15.02% for the day
You would have been down 26.139% in 2 days

3/18/20 the strategy was down 16.59% for the day

The same AA though is up 43.67% YTD (as of 9/17/20).

[AnilG]

The recent drop in performance is insignificant compared to the Top 5 Drawdowns in last 10 years for UPRO/TMF 40/60 no rebalancing strategy.

Code: Select all

Worst Drawdown Periods	net drawdown in %	peak date	valley date	recovery date	duration
0	58.95	2020-02-19	2020-03-18	NaT	NaN
1	41.65	2018-01-26	2018-12-24	2019-06-20	365
2	25.68	2015-03-20	2015-09-28	2016-06-08	319
3	19.46	2013-05-02	2013-06-24	2013-10-29	129
4	16.00	2016-08-23	2016-11-14	2017-02-17	129

And, same for TQQQ/TMF strategy.

Code: Select all

Worst Drawdown Periods	net drawdown in %	peak date	valley date	recovery date	duration
0	59.16	2020-02-19	2020-03-18	2020-07-08	101
1	50.52	2018-08-29	2018-12-24	2019-07-24	236
2	25.85	2018-01-26	2018-02-08	2018-03-12	32
3	25.50	2012-07-25	2013-06-25	2013-12-23	369
4	24.42	2018-03-12	2018-04-02	2018-06-14	69

This strategy has gotten crushed recently and it's only going to continue IMO. Investors aren't eager to rush into bonds during crashes when the 10 year is yielding 0.69%. Meanwhile, the leveraged 3x ETFs will continue to suffer from volatility decay. I think you are better off seeking leverage through long term index call options.

[sweetnpsycho]

In terms of backtesting, it seems quarterly rebalancing outperformed monthly or semi-annually or annually rebalancing.

Can someone test bi-monthly and every 4 months rebalancing and see how they compare to quarterly rebalancing?

[Thereum]

AnilG, thanks for the post and data. Those examples occurred when interest rates were much higher. Have you seen any relationship between interest rates and the correlation between stocks and treasuries? My fear is that the traditional negative correlation is beginning to disappear, perhaps because treasuries have been bid up too much to be considered a safe haven.

[kim.gold]

This strategy has gotten crushed recently and it's only going to continue IMO. Investors aren't eager to rush into bonds during crashes when the 10 year is yielding 0.69%. Meanwhile, the leveraged 3x ETFs will continue to suffer from volatility decay. I think you are better off seeking leverage through long term index call options.

You make a good point regarding leverage through long term index call options. Using long term call options or LEAPS is a very valuable leveraging strategy. One LEAPS contract capture the benefits of extremely low financing, adjustment for dividends, lower market drop risk, and negative correlation with market volatility.

On the other hand, there is no good alternative for leveraged LTTs. We had days in Mar and Sep as well, when investors run to cash and sell everything, including LTTs.

You can actually go with SWAN etf if you like it. SWAN uses SPY LEAPS and treasury futures to achieve 150% leverage.

[cos]

Good news for those of us with high TMF allocations. Looks like we shouldn't have to worry about rate hikes until at least 2023.

Again, I'd like to remind everyone that this is a very long-term strategy on the order of decades, and it's silly to focus on time periods as short as 3 years. However, this bodes well for anyone looking to get started in the next 3 years as they're less likely to face any serious headwinds on the bond side.

Back when I was running simulations, the majority of worst case scenarios seemed to result from low or negative returns in the first few years. The opposite was also true with the best outcomes manifesting after strong starts. This strategy is frighteningly start-date-sensitive.

So, here's hoping that rates really stay low and that the bull rages on!

Cos, do you use the original 40/60 UPRO:TMF allocation? You mention being high TMF. Thanks.

Nope! I'm using the updated 55/45 UPRO/TMF allocation, rebalancing quarterly. I say I have a high allocation because I'm all-in on this strategy and so 45% of my entire portfolio is invested in TMF. If anything bad happens to either UPRO or TMF, I'm losing about half my net worth.

[Mickelous]

This isn't easily backtestable but I'm considering going with 5% volatility futures and 5% 2x gold along with the rest of the portfolio with tqqq/upro/tmf inverse volatility. This prevents taking a huge position in volatility futures and gold which happens with inverse vol calculations, while still getting the benefits of inverse volatility with the other 90% of the portfolio. It helps reduce drawdowns a fair amount without giving up too much cagr.

[cos]

This strategy has underperformed for a few weeks. Don't read too much into it.

There are whole years where the strategy lost 10-15 percent. I'm still up 15% for the 5 months I've been it.

There are whole years the S&P has lost even more. I’m down 2% this week, 5% this month, UP 11% this quarter, and 40% in the last 12 months - all of which is highly start date dependent.

This strategy isn’t guaranteed to go straight up (or up at all) but neither is traditional index investing

Emphasis mine. This is such an important point, and being a leveraged strategy, the Adventure can be understood only on time scales longer than those of unleveraged equity-heavy positions. That means decades.

Anybody emotionally perturbed by events occurring on the order of months should absolutely avoid this strategy. It's not worth the stress, and it's not worth the money you'll lose when you inevitably reallocate in an attempt to make yourself more comfortable. This forum is full of better advice and better strategies for short-term investing.

Leverage only makes sense for people with above-average ability, willingness, and need to take risk. If you're the average person, you should probably avoid it, and you should certainly avoid this strategy.

In fact, there are arguably better ways to leverage and reallocate your portfolio if you really want to take advantage of all of the latest research, only some of which informs the Adventure. A Bogleheads user, Uncorrelated, posted a wonderful guide on that over here: viewtopic.php?f=10&t=322366 (A lot of this follows from the observation that bucketing is a suboptimal strategy for managing risk.)

[Hydromod]

In terms of backtesting, it seems quarterly rebalancing outperformed monthly or semi-annually or annually rebalancing.

Can someone test bi-monthly and every 4 months rebalancing and see how they compare to quarterly rebalancing?

I did a bunch of backtesting in this thread. The conclusion on quarterly rebalancing that you are referring to is based on backtests with end-of-quarter rebalancing, which are a bit anomalous. Using an offset from the end of quarter (such as one month earlier or later) has historically performed significantly worse. With a monthly rebalance strategy, times near the end/beginning of each month also have tended to do better. There was a bonus for rebalancing every day or two, but trading costs would likely eat that up.

I think that backtesting suggests that the spread in CAGR calculated for the same duration but different start date gets wider as the rebalance period increases, but there is too much variability to determine which duration would have the largest expected CAGR overall.

[sweetnpsycho]

In terms of backtesting, it seems quarterly rebalancing outperformed monthly or semi-annually or annually rebalancing.

Can someone test bi-monthly and every 4 months rebalancing and see how they compare to quarterly rebalancing?

I did a bunch of backtesting in this thread. The conclusion on quarterly rebalancing that you are referring to is based on backtests with end-of-quarter rebalancing, which are a bit anomalous. Using an offset from the end of quarter (such as one month earlier or later) has historically performed significantly worse. With a monthly rebalance strategy, times near the end/beginning of each month also have tended to do better. There was a bonus for rebalancing every day or two, but trading costs would likely eat that up.

I think that backtesting suggests that the spread in CAGR calculated for the same duration but different start date gets wider as the rebalance period increases, but there is too much variability to determine which duration would have the largest expected CAGR overall.

Thank you. I do try to rebalance on the 1st of each quarter.

[occambogle]

The conclusion on quarterly rebalancing that you are referring to is based on backtests with end-of-quarter rebalancing, which are a bit anomalous. Using an offset from the end of quarter (such as one month earlier or later) has historically performed significantly worse. With a monthly rebalance strategy, times near the end/beginning of each month also have tended to do better. There was a bonus for rebalancing every day or two, but trading costs would likely eat that up.

So you are saying that if doing quarterly-rebalancing, it's better to do it exactly at the beginning/end of each calendar quarter... as opposed to every 3 months from when you started if that is different? I last rebalanced my TMF/TQQQ on 9th July (which was my roughly 3months) so the next one wasn't due until early/mid October. It's currently sitting at almost exactly my target of 48/52 (the recent downturn effectively rebalanced TQQQ down from a high 60s... grrrr). So what would be the best way to move into a calendar-quarterly rebalancing now.... rebalance on Sept 31st/Oct 1st?

[Hydromod]

So you are saying that if doing quarterly-rebalancing, it's better to do it exactly at the beginning/end of each calendar quarter... as opposed to every 3 months from when you started if that is different? I last rebalanced my TMF/TQQQ on 9th July (which was my roughly 3months) so the next one wasn't due until early/mid October. It's currently sitting at almost exactly my target of 48/52 (the recent downturn effectively rebalanced TQQQ down from a high 60s... grrrr). So what would be the best way to move into a calendar-quarterly rebalancing now.... rebalance on Sept 31st/Oct 1st?

Historically rebalancing within a few days of the calendar quarters has performed the best. Whether or not that is something accidental or structural (maybe with traders trying to meet end-of-quarter quotas etc.), I have no idea. But if I were rebalancing quarterly instead of bands, I'd do the calendar quarters.

[dru808]

Why isn’t the op updating the performance of this strategy?

[dru808]

Good news for those of us with high TMF allocations. Looks like we shouldn't have to worry about rate hikes until at least 2023.

Again, I'd like to remind everyone that this is a very long-term strategy on the order of decades, and it's silly to focus on time periods as short as 3 years. However, this bodes well for anyone looking to get started in the next 3 years as they're less likely to face any serious headwinds on the bond side.

Back when I was running simulations, the majority of worst case scenarios seemed to result from low or negative returns in the first few years. The opposite was also true with the best outcomes manifesting after strong starts. This strategy is frighteningly start-date-sensitive.

So, here's hoping that rates really stay low and that the bull rages on!

Cos, do you use the original 40/60 UPRO:TMF allocation? You mention being high TMF. Thanks.

Nope! I'm using the updated 55/45 UPRO/TMF allocation, rebalancing quarterly. I say I have a high allocation because I'm all-in on this strategy and so 45% of my entire portfolio is invested in TMF. If anything bad happens to either UPRO or TMF, I'm losing about half my net worth.

Whoa, ballsy

[rchmx1]

Why isn’t the op updating the performance of this strategy?

He got tired of some rather condescending nay-sayers continually posting the same objections over and over, so left the forum. Understandable and unfortunate.

[Perfect Uncertainty]

Why isn’t the op updating the performance of this strategy?

He isn’t here any longer. Such a pity.

[BTTFutures]

Hi - I'm looking for the simulated UPRO/TMF data back to 1956 and I'm only seeing yearly data from Simba's spreadsheet. Is there a monthly data set out there besides the data to 1986? I'd like to experiment with including gold and low volatility sp500 sector ETFs.

Second, has anyone looked into segmenting out the periods of bond yield increasing, decreasing, and net no change then comparing modeling results for each given yield environment? Any issue with an underlining sentiment that yields are going to continue to fall over the past 30 years, therefore invalidating the results from this concept?

[AnilG]

Calendar quarter “phantom” outperformance is typical of securities issuing quarterly distributions and dividends and analysis being performed based on price adjusted for such distributions. Typically, after observing such pattern, an analysis using unadjusted price can confirm validity of such patterns.

Historically rebalancing within a few days of the calendar quarters has performed the best. Whether or not that is something accidental or structural (maybe with traders trying to meet end-of-quarter quotas etc.), I have no idea. But if I were rebalancing quarterly instead of bands, I'd do the calendar quarters.

[Alchemist]

This isn't easily backtestable but I'm considering going with 5% volatility futures and 5% 2x gold along with the rest of the portfolio with tqqq/upro/tmf inverse volatility. This prevents taking a huge position in volatility futures and gold which happens with inverse vol calculations, while still getting the benefits of inverse volatility with the other 90% of the portfolio. It helps reduce drawdowns a fair amount without giving up too much cagr.

Starting to think maybe this thread should be re-named to r/bogleheadbets

[perfectuncertainty]

Starting to think maybe this thread should be re-named to r/bogleheadbets

Sell your TMF for some tendies?

[rascott]

This isn't easily backtestable but I'm considering going with 5% volatility futures and 5% 2x gold along with the rest of the portfolio with tqqq/upro/tmf inverse volatility. This prevents taking a huge position in volatility futures and gold which happens with inverse vol calculations, while still getting the benefits of inverse volatility with the other 90% of the portfolio. It helps reduce drawdowns a fair amount without giving up too much cagr.

Starting to think maybe this thread should be re-named to r/bogleheadbets

Probably should... since Hedgefundie left the forum entirely

[am]

Why isn’t the op updating the performance of this strategy?

He got tired of some rather condescending nay-sayers continually posting the same objections over and over, so left the forum. Understandable and unfortunate.

Thin skinned. Why should anyone care what’s posted on an anonymous forum?

[Kruger25]

If Hedgefundie's portfolio was USD 99,000 on March 18th, what would it be today? Would it be possible for someone else to present an updated graph by using Portfolio Visualizer, for example?

[rchmx1]

Why isn’t the op updating the performance of this strategy?

He got tired of some rather condescending nay-sayers continually posting the same objections over and over, so left the forum. Understandable and unfortunate.

Thin skinned. Why should anyone care what’s posted on an anonymous forum?

Not untrue, but there are better ways to spend one's time than on an online forum which annoys you.

[LadyGeek]

Please stay on-topic.

[perfectuncertainty]

If Hedgefundie's portfolio was USD 99,000 on March 18th, what would it be today? Would it be possible for someone else to present an updated graph by using Portfolio Visualizer, for example?

You can look up the prices on Yahoo and figure that out.

182,908.79

[curiousvester]

Hello guys, I am new on this forum however I have read a significant portion of it. I like the HFEA strategy with 55/45 UPRO TMF. The AAA method of rebalancing looks promising however I haven't had full grasp of it yet. I prefer to rebalance quarterly due to lesser number of transactions required. My question is, will AAA (with volatility period of 3 months to match the rebalancing period) provide materially improved performance with smaller drawdowns compared to 55/45 portfolio over the long term.

[hilink73]

Hello guys, I am new on this forum however I have read a significant portion of it. I like the HFEA strategy with 55/45 UPRO TMF. The AAA method of rebalancing looks promising however I haven't had full grasp of it yet. I prefer to rebalance quarterly due to lesser number of transactions required. My question is, will AAA (with volatility period of 3 months to match the rebalancing period) provide materially improved performance with smaller drawdowns compared to 55/45 portfolio over the long term.

No one knows what the future will bring.
Choose a strategy and stick with it.

[BuffMaltese]

For the 21 day inverse volatility model, I had a question regarding the timing of AA. When do you change the AA? End of the month? The confusion is, for example, on PV the sept allocation for this model is 44/56 tqqq/tmf. Then i see a signal date on 9/18 that has a new allocation 23/77 tqqq/tmf. Is the AA changed as soon as signal Is given or is that going to be the AA on 10/01? Or is this the wrong signal all together?

[Perfect Uncertainty]

For the 21 day inverse volatility model, I had a question regarding the timing of AA. When do you change the AA? End of the month? The confusion is, for example, on PV the sept allocation for this model is 44/56 tqqq/tmf. Then i see a signal date on 9/18 that has a new allocation 23/77 tqqq/tmf. Is the AA changed as soon as signal Is given or is that going to be the AA on 10/01? Or is this the wrong signal all together?

PV provides monthly values and if you have a paid subscription you can see what the values would have been at the previous days close. If you are able to calculate the AAA IV model you can see the values in real time or close to real time depending on how current the prices are in your model/tool/spreadsheet.

[BuffMaltese]

I must be in a trial period because it seems I can see the daily aa recommendation.

My question is, do you do anything with that information? Are you making adjustments daily? Only using the indicator at the end of the month? Or does it depend on the percentage change. There is a huge difference in AA at the beginning of sept and what it is now

[perfectuncertainty]

I must be in a trial period because it seems I can see the daily aa recommendation.

My question is, do you do anything with that information? Are you making adjustments daily? Only using the indicator at the end of the month? Or does it depend on the percentage change. There is a huge difference in AA at the beginning of sept and what it is now

No - it’s a good reference. I've found best AAA IV is achieved with monthly adjustments. The percentages change every day so it will be the percentage change published after the last trading day of the month.

[BuffMaltese]

I must be in a trial period because it seems I can see the daily aa recommendation.

My question is, do you do anything with that information? Are you making adjustments daily? Only using the indicator at the end of the month? Or does it depend on the percentage change. There is a huge difference in AA at the beginning of sept and what it is now

No - it’s a good reference. I've found best AAA IV is achieved with monthly adjustments. The percentages change every day so it will be the percentage change published after the last trading day of the month.

Thanks, I appreciate the response

[perfectuncertainty]

I must be in a trial period because it seems I can see the daily aa recommendation.

My question is, do you do anything with that information? Are you making adjustments daily? Only using the indicator at the end of the month? Or does it depend on the percentage change. There is a huge difference in AA at the beginning of sept and what it is now

No - it’s a good reference. I've found best AAA IV is achieved with monthly adjustments. The percentages change every day so it will be the percentage change published after the last trading day of the month.

Thanks, I appreciate the response

Did you download the spreadsheet that was doing the rounds?

[BuffMaltese]

No I hadn’t downloaded the file. I’ve been referencing the PV filled out by another user earlier in this thread. One 21 day minimum variance and the other 21 day inverse volatility.

[kjm]

Hi all,

New to the thread, which I came across looking for ways to use leveraged ETFs to increase risk-adjusted returns. Is everyone here running this with fixed allocations? I've done some backtesting, and it looks like you can get better risk-adjusted returns by adding additional assets and doing a little volatility targeting. So, instead of rebalancing to a fixed allocation, you'd rebalance to an allocation determined by the trailing volatility of each asset. I specifically looked at UPRO, TQQQ, TMF and UGL. I rebalanced based on each asset's relative volatility to get the following (going back to 2010)...

MODEL RESULTS
Annualized Return: 30.16%
Max Drawdown: -33.16%
Standard Deviation: 22.54%

55/45 RESULTS
Annualized Return: 32.08%
Max Drawdown: -43.89%
Standard Deviation: 25.85%

So, if you're doing anything more sophisticated than 55/45 UPRO/TMF, I'm interested to know your strategy.

[perfectuncertainty]

Hi all,

New to the thread, which I came across looking for ways to use leveraged ETFs to increase risk-adjusted returns. Is everyone here running this with fixed allocations? I've done some backtesting, and it looks like you can get better risk-adjusted returns by adding additional assets and doing a little volatility targeting. So, instead of rebalancing to a fixed allocation, you'd rebalance to an allocation determined by the trailing volatility of each asset. I specifically looked at UPRO, TQQQ, TMF and UGL. I rebalanced based on each asset's relative volatility to get the following (going back to 2010)...

MODEL RESULTS
Annualized Return: 30.16%
Max Drawdown: -33.16%
Standard Deviation: 22.54%

55/45 RESULTS
Annualized Return: 32.08%
Max Drawdown: -43.89%
Standard Deviation: 25.85%

So, if you're doing anything more sophisticated than 55/45 UPRO/TMF, I'm interested to know your strategy.

What did you do for volatility testing and allocation? AAA IV?

[rchmx1]

Hi all,

New to the thread, which I came across looking for ways to use leveraged ETFs to increase risk-adjusted returns. Is everyone here running this with fixed allocations? I've done some backtesting, and it looks like you can get better risk-adjusted returns by adding additional assets and doing a little volatility targeting. So, instead of rebalancing to a fixed allocation, you'd rebalance to an allocation determined by the trailing volatility of each asset. I specifically looked at UPRO, TQQQ, TMF and UGL. I rebalanced based on each asset's relative volatility to get the following (going back to 2010)...

MODEL RESULTS
Annualized Return: 30.16%
Max Drawdown: -33.16%
Standard Deviation: 22.54%

55/45 RESULTS
Annualized Return: 32.08%
Max Drawdown: -43.89%
Standard Deviation: 25.85%

So, if you're doing anything more sophisticated than 55/45 UPRO/TMF, I'm interested to know your strategy.

While you're waiting for responses I'd suggest reading the full thread, since there have been many discussions of alternatives to the fixed allocation version.

[kjm]

What did you do for volatility testing and allocation? AAA IV?

What's "AAA IV"?

I calculated the standard deviation of each ETF over the trailing quarter. Then I assigned each ETF a portfolio weight equal to the inverse of that value. So, less volatile assets get a larger allocation. This can obviously be optimized. I'm really just proving the concept at this point.

As I'm sure you know, Cboe has a forward-looking volatility product for each asset class - VIX, VXN, VXTLT and GVZ. Those work well too, but only over shorter look-back periods. They also move around a lot. So, the result is a portfolio you have to rebalance very frequently so it doesn't stray too far from the target allocation.

If you want to improve the risk profile at the expense of overall returns, you can then calculate the standard deviation of the resulting portfolio and scale your exposure to it from say 0.5 to 1.0 based on the result. Using a 15-day look-back for this step, you could get something like this...

MODEL RESULTS
Annualized Return: 25.07%
Max Drawdown: -21.85%
Standard Deviation: 18.03%

If you're looking to maximize returns and don't care about volatility or drawdowns, the 55/45 portfolio wins. I however learned the hard way I don't have the stomach for a -35% drop in my liquid net worth!

While you're waiting for responses I'd suggest reading the full thread, since there have been many discussions of alternatives to the fixed allocation version.

Thanks for the heads-up. I will definitely dig into it.

[perfectuncertainty]

What did you do for volatility testing and allocation? AAA IV?

What's "AAA IV"?

I calculated the standard deviation of each ETF over the trailing quarter. Then I assigned each ETF a portfolio weight equal to the inverse of that value. So, less volatile assets get a larger allocation. This can obviously be optimized. I'm really just proving the concept at this point.

As I'm sure you know, Cboe has a forward-looking volatility product for each asset class - VIX, VXN, VXTLT and GVZ. Those work well too, but only over shorter look-back periods. They also move around a lot. So, the result is a portfolio you have to rebalance very frequently so it doesn't stray too far from the target allocation.

If you want to improve the risk profile at the expense of overall returns, you can then calculate the standard deviation of the resulting portfolio and scale your exposure to it from say 0.5 to 1.0 based on the result. Using a 15-day look-back for this step, you could get something like this...

MODEL RESULTS
Annualized Return: 25.07%
Max Drawdown: -21.85%
Standard Deviation: 18.03%

If you're looking to maximize returns and don't care about volatility or drawdowns, the 55/45 portfolio wins. I however learned the hard way I don't have the stomach for a -35% drop in my liquid net worth!

Thanks for the heads-up. I will definitely dig into it.

PV calculates inverse volatility on the Adapativer Asset Allocation. The 4 symbols you used are plotted here: Link