HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by Steve Reading »

Uncorrelated wrote: Sun Aug 30, 2020 4:33 pm
langlands wrote: Sun Aug 30, 2020 2:55 pm
Uncorrelated wrote: Sun Aug 30, 2020 2:45 pm
You don't have to use recent volatility as a measure of future volatility. First of all, because of volatility clustering, it's not that bad an estimate and is the baseline in any predictive model. Second of all, you can just use the VIX or any other measure of implied volatility. I have no idea why you would say that it's absurd to claim 1/σ is a compromise between 1 and 1/σ^2. I mean, your prediction of future stock volatility doubles. Your return expectations haven't changed. Merton tells you to decrease your stock allocation by a factor of 4. You decrease it by a factor of 2. That's absurd? It's simply a fact that applying TV will lead to an allocation in between constant and Merton's.

I've noticed a rather dogmatic tendency in your way of thinking where you feel the need to put any problem in a precise framework and then find the optimal solution within that framework. Coming from a math background, I can of course sympathize. However, finance is quite a bit messier than math or physics and there is always the danger of model error lurking in the background. When it comes to these murkier topics, I find it much more illuminating to get the "gist" of what each model is telling me rather than actually believing the numerical answer it spits out. So for example, the idea that when volatility increases, it makes sense to decrease allocation to that asset.
I'm aware of volatility clustering. According to my tests using either past volatility or VIX as an estimate for future volatility doesn't work well enough to beat the market. Only with a high quality volatility forecast (better than VIX), merton's portfolio theory and a trading strategy that limits turnover rate, I was able to obtain higher utility than a constant allocation (semi out-of-sample).
So I decided to revisit this to see for myself since AQR is a big proponent of volatility targeting and they're very empirically inclined. Here's what I did. I want to see how it compares to what you've done:
1) I used VOX and VIX end-of-month closing price from back to 1986. For US TSM returns, I'm using FF data.
2) The strategy is brutally simple. The point is to target ~20% volatility, since that was the volatility of US stocks since 1926 to 1986. The strategy uses the previous month's VIX and either invests in T-Bills or leverages in order to target 20% volatility. So if the VIX was 40, it would invest 50/50 stocks/T-Bills. If the VIX was 15, it would invest 133/-33 stocks/T-Bills. I give it a 1% penalty for any short T-Bills (borrowing friction).

I get a CAGR of 11.57% and St Dev. (monthly, annualized) of 14.81%, for a Sharpe of 0.61.
US TSM OTOH got a CAGR 10.87%, St Dev of 15.39% and Sharpe of 0.547.

I didn't even re-size VIX to account for the volatility premium since realistically, people back in 1986 wouldn't have known how to do that. But I found that even if I did, the results just don't change much (Sharpe basically stays at 0.61). The above doesn't have transaction costs though. I have reason to believe this doesn't matter a whole lot though.

Is this roughly consistent with what you've found?

EDIT: Once I look at the Sharpe on an annual basis, it's basically neck and neck with US TSM. In other words, (avg monthly returns-avg monthly T-bill returns)/(annualized monthly St Dev) is better for volatility targeting (0.611 vs 0.547 Sharpe). But (avg yearly returns-avg yearly T-Bill returns)/(annual St Dev) is basically the same (0.537 vs 0.511). That tiny advantage, surely transaction costs would eat and just doesn't seem big enough to matter.

So I guess my conclusion actually is similar to yours. Not sure there's much excitement to be had here. Not that I volatility target any ways, just an interesting topic is all.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

Tingting1013 wrote: Sat Oct 10, 2020 9:59 am
Uncorrelated wrote: Sat Oct 10, 2020 2:58 am You invest to meet your financial goals. Meeting your financial goals is a function of the probability distribution of total portfolio outcomes. By bucketing your portfolio, the optimization processes is compromised and you are guaranteed not to select the portfolio that is best to meet your financial goals.

Bucketing can be seen as a trade-off between simplicity and efficiency. If that's the trade-off you want to make, that's okay. But that doesn't change the underlying math: meeting your financial goals is still a function of your total portfolio. Some models even include your human capital and future social security benefits as part of your portfolio, this can result in large certainty equivalent (risk adjusted) gains.
I do not read the original intent of HFEA as “meeting financial goals”. I read it as a 20-year lottery ticket that may or may not hit (with much better odds than a lottery ticket). What is the optimal allocation to a lottery ticket?

Those who try to incorporate HFEA into their core portfolios are violating one of tenets of HFEA, which is to invest once and let it ride. Would any other strategy successfully grow $100k to $10M, the stated goal in the very first post?
There are more lottery tickets than 55/45. For example 60/40, or even 100/0. The assumptions that make 55/45 optimal are just as arbitrary as the assumptions that make 100/0 optimal. There is no reason to pay special attention to 55/45.

You want to know what the best portfolio is, not what the best portfolio is that includes 55/45. My mean variance optimizer is capable of answering that question for any collection of assets (with some general assumptions). If your assumptions and risk aversion matches HF's, you will find that a 100% allocation to 55/45 is optimal. If your assumptions or risk aversion are different, you will find something else as the optimum. Simple.

I invest according to logic and expected utility maximization, not according to tenets. I suggest you do the same.

Steve Reading wrote: Sat Oct 10, 2020 12:44 pm
Uncorrelated wrote: Sun Aug 30, 2020 4:33 pm
langlands wrote: Sun Aug 30, 2020 2:55 pm
Uncorrelated wrote: Sun Aug 30, 2020 2:45 pm
You don't have to use recent volatility as a measure of future volatility. First of all, because of volatility clustering, it's not that bad an estimate and is the baseline in any predictive model. Second of all, you can just use the VIX or any other measure of implied volatility. I have no idea why you would say that it's absurd to claim 1/σ is a compromise between 1 and 1/σ^2. I mean, your prediction of future stock volatility doubles. Your return expectations haven't changed. Merton tells you to decrease your stock allocation by a factor of 4. You decrease it by a factor of 2. That's absurd? It's simply a fact that applying TV will lead to an allocation in between constant and Merton's.

I've noticed a rather dogmatic tendency in your way of thinking where you feel the need to put any problem in a precise framework and then find the optimal solution within that framework. Coming from a math background, I can of course sympathize. However, finance is quite a bit messier than math or physics and there is always the danger of model error lurking in the background. When it comes to these murkier topics, I find it much more illuminating to get the "gist" of what each model is telling me rather than actually believing the numerical answer it spits out. So for example, the idea that when volatility increases, it makes sense to decrease allocation to that asset.
I'm aware of volatility clustering. According to my tests using either past volatility or VIX as an estimate for future volatility doesn't work well enough to beat the market. Only with a high quality volatility forecast (better than VIX), merton's portfolio theory and a trading strategy that limits turnover rate, I was able to obtain higher utility than a constant allocation (semi out-of-sample).
So I decided to revisit this to see for myself since AQR is a big proponent of volatility targeting and they're very empirically inclined. Here's what I did. I want to see how it compares to what you've done:
1) I used VOX and VIX end-of-month closing price from back to 1986. For US TSM returns, I'm using FF data.
2) The strategy is brutally simple. The point is to target ~20% volatility, since that was the volatility of US stocks since 1926 to 1986. The strategy uses the previous month's VIX and either invests in T-Bills or leverages in order to target 20% volatility. So if the VIX was 40, it would invest 50/50 stocks/T-Bills. If the VIX was 15, it would invest 133/-33 stocks/T-Bills. I give it a 1% penalty for any short T-Bills (borrowing friction).

I get a CAGR of 11.57% and St Dev. (monthly, annualized) of 14.81%, for a Sharpe of 0.61.
US TSM OTOH got a CAGR 10.87%, St Dev of 15.39% and Sharpe of 0.547.

I didn't even re-size VIX to account for the volatility premium since realistically, people back in 1986 wouldn't have known how to do that. But I found that even if I did, the results just don't change much (Sharpe basically stays at 0.61). The above doesn't have transaction costs though. I have reason to believe this doesn't matter a whole lot though.

Is this roughly consistent with what you've found?

EDIT: Once I look at the Sharpe on an annual basis, it's basically neck and neck with US TSM. In other words, (avg monthly returns-avg monthly T-bill returns)/(annualized monthly St Dev) is better for volatility targeting (0.611 vs 0.547 Sharpe). But (avg yearly returns-avg yearly T-Bill returns)/(annual St Dev) is basically the same (0.537 vs 0.511). That tiny advantage, surely transaction costs would eat and just doesn't seem big enough to matter.

So I guess my conclusion actually is similar to yours. Not sure there's much excitement to be had here. Not that I volatility target any ways, just an interesting topic is all.
On 1940-2020, rebalance interval of 21 days, γ = 5, max stock allocation of 1, no trading costs, I get these CER (certainty equivalent return):
out-of-sample CER of 2.182% (in-sample 2.646%) with a constant allocation.
out-of-sample CER of 2.131% (in-sample 2.436%) with inverse volatility, using last months volatility as the volatility estimate.
out-of-sample CER of 2.208% (in-sample 2.303%) with merton's portfolio problem, using last months volatility as the volatility estimate.
out-of-sample CER of 3.328% (in-sample 3.500%) with merton's portfolio problem, using a machine learning pipeline as the volatility estimate.

The volatility target was selected by testing various settings on the training set, the one with the highest expected utility (for γ = 5) was chosen on the test set. As you can see there is quite a large drop between in-sample and out-of-sample, in particular with the constant allocation. This probably indicates that there is a large measurement error in these figures.

I don't recall what numbers I got for VIX, other than that they were disappointing. Using VIX as a feature in my machine learning pipeline also doesn't help.

(before anyone asks: after factoring in transaction costs, the results from my machine learning pipeline are still better than a constant allocation, but only by a small amount that is not economically significant. This was after making the trading system transaction cost aware, and incorporating a variable trading interval.)

I can't say for certain, but I suspect your test has a look-ahead bias because inverse volatility tends to select higher average equity allocations, and the test period saw above average equity returns?
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Uncorrelated wrote: Sat Oct 10, 2020 4:44 pm On 1940-2020, rebalance interval of 21 days, γ = 5, max stock allocation of 1, no trading costs, I get these CER (certainty equivalent return):
out-of-sample CER of 2.182% (in-sample 2.646%) with a constant allocation.
out-of-sample CER of 2.131% (in-sample 2.436%) with inverse volatility, using last months volatility as the volatility estimate.
out-of-sample CER of 2.208% (in-sample 2.303%) with merton's portfolio problem, using last months volatility as the volatility estimate.
out-of-sample CER of 3.328% (in-sample 3.500%) with merton's portfolio problem, using a machine learning pipeline as the volatility estimate.

The volatility target was selected by testing various settings on the training set, the one with the highest expected utility (for γ = 5) was chosen on the test set. As you can see there is quite a large drop between in-sample and out-of-sample, in particular with the constant allocation. This probably indicates that there is a large measurement error in these figures.
Gotcha, although this isn't the same time period and I didn't approach it from a utility perspective. I was just looking to see if it could outperform the market while being less volatile. I'm also realizing now that you don't allow leverage either.
Uncorrelated wrote: Sat Oct 10, 2020 4:44 pm I can't say for certain, but I suspect your test has a look-ahead bias because inverse volatility tends to select higher average equity allocations, and the test period saw above average equity returns?
I don't think so. If I select a target volatility of 13.8%, it spends an average time in the market equal to just 100/0, but its CAGR is higher (10.78% vs 10.57%) and the volatility lower (12.94% vs 15.16%) for a larger Sharpe (0.626 vs 0.543). So the time it does choose to spend in the market does happen to be the more attractive times, both in terms of greater returns and lower volatility.

Thanks for the thoughts though, very appreciated :)
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
babbysfirststonk
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by babbysfirststonk »

bobwuzbob wrote: Fri Oct 09, 2020 5:34 pm
babbysfirststonk wrote: Fri Oct 09, 2020 3:18 pm
kjm wrote: Thu Oct 08, 2020 8:36 pm
I don't think a permanent position in VXX is the best way to improve risk-adjusted returns. It takes more than it gives over the long run. Now, if you could figure out how to 1) hold it strategically and 2) size the position appropriately, you'd be onto something.

If the goal is to improve risk-adjusted returns, the following strategy is effective and low-effort.
I agree about VXX, but keep in mind XVZ has a lot less drawdown. The lowest it ever fell from its initial value when it launched in Sept 2011 was 32%. I bring it up because adding even 5% to the portfolio decreases maximum drawdown at the cost of lowered returns. Here's a backtest showing what I'm talking about. VIX positively correlates with having better worst years, smaller maximum drawdowns, and worse total returns. It's a tradeoff that the investor can decide if they want to make. IMO though, the optimal VIX allocation will probably be small, but nonzero.

And if you use the portfolio optimizer to minimize maximum drawdown over the same time interval, it will actually put 1/3 of your assets in XVZ.

Also, that strategy looks interesting, but just to be clear, that's an active portfolio right?
I would recommend against putting anything in XVZ currently since volume is incredibly low. It has an average volume of just a bit more than 3,000. It looks fine in PV since it doesn't take into account how illiquid and low volume it is. If you plan on rebalancing regularly with M1 you will get terrible fills with this ETF.
Thanks for reminding me. And since any VIX holdings will require regular rebalancing in order to keep them nonzero, the low liquidity is very important to keep in mind.

I guess the best way to think of VIX in terms of the Hedgefundie portfolio is that it's like TMF but more extreme. TMF itself is expensive in terms of opportunity cost, but it helps decrease volatility. VIX would decrease volatility even more than TMF, but the opportunity cost goes up even more as well.

My point is just that VIX can help decrease risk for those who think Hedgefundie's portfolio is too risky.
gokuisthebest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gokuisthebest »

Does anyone know how to buy these etfs(UPRO/TMF/GLD/TQQQ) or replicate them as close as possible for someone outside US? The brokers arent allowing if you are a retail investor.

EDIT: Country is Singapore.
Last edited by gokuisthebest on Sun Oct 11, 2020 7:56 am, edited 1 time in total.
hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 »

gokuisthebest wrote: Sun Oct 11, 2020 4:35 am Does anyone know how to buy these etfs(UPRO/TMF/GLD/TQQQ) or replicate them as close as possible for someone outside US? The brokers arent allowing if you are a retail investor.
This probably depends on where outside of the US you are.

Living in Switzerland, I do not have any problems buying those (or other, e. g. SCV) ETFs via Interactive Brokers.
(Switzerland doesn't fall under EU customer "protection" regulations, though).
gokuisthebest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gokuisthebest »

hilink73 wrote: Sun Oct 11, 2020 7:11 am
gokuisthebest wrote: Sun Oct 11, 2020 4:35 am Does anyone know how to buy these etfs(UPRO/TMF/GLD/TQQQ) or replicate them as close as possible for someone outside US? The brokers arent allowing if you are a retail investor.
This probably depends on where outside of the US you are.

Living in Switzerland, I do not have any problems buying those (or other, e. g. SCV) ETFs via Interactive Brokers.
(Switzerland doesn't fall under EU customer "protection" regulations, though).
Sorry i forgot to mention that. I live in Singapore, edited my previous reply.
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mac25
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by mac25 »

I am new here (first post!) and have read as much as I could of this and the previous thread.

I am 21 years old and have $12k in my Roth IRA. Explain to me why I shouldn't invest all (or most) of my current and future IRA to this strategy given that I believe this will be insignificant if lost to my retirment (please correct me if this belief is fallacious).

More info:

My partner and I are both 21.
Together we are able to invest $120k a year across all accounts (we both max Roth IRA, 401(k), HYSV (down payment), etc).
Current NW: 50k (first year out of college)
Debt: None

I am interested in putting the $12k I have in my IRA into the UPRO(55)/TMF(45) strategy (leaving my partners in the 3 fund). And adding $6k every year to it until I reach around $100k. After that, I will invest the rest into a 3 fund. I realize that this would be putting a significant portion of our current NW into this risky strategy but as I am 40+ years away from retirement I am willing to take this risk.

Thanks in advance. :happy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LadyGeek »

Welcome! Please see my post here: Re: Riding HEDGEFUNDIE’s excellent adventure

May I suggest you start a new thread in the Personal Investments forum using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask in that thread.
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stimulacra
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stimulacra »

Just out of curiosity; is there a time of day that's best or most convenient to rebalance?

I'm used to doing it with Mutual Funds so never had to worry much or at all about the exact minute of when to hit the button.

This would be within M1 Finance (Roth IRA).
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dziuniek
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

stimulacra wrote: Mon Oct 12, 2020 12:14 pm Just out of curiosity; is there a time of day that's best or most convenient to rebalance?

I'm used to doing it with Mutual Funds so never had to worry much or at all about the exact minute of when to hit the button.

This would be within M1 Finance (Roth IRA).
M1 only allows once a day anyways. (twice if you use their premium services). So no choices to be made here anyways.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CanaBogle24 »

It seems about half this thread (more?) has been focused on what TMF (or other bond variants of it) might yield over the next decade+ given the rate we're starting with today, and what that means for the viability of this strategy.

After some deliberation, I decided to go with an even heavier equity allocation than the original HFEA revision. I'm using 33/32/35 UPRO/TQQQ/TMF.

It seemed in most longer term backtests that equity allocations up to 65-70% tended to yield the best CAGR; however, generally the diminishing returns above ~55% weren't worth the severity of drawdowns that came with them. However, with rates where they're at now, I decided to squeeze as much juice as I can from the equity side, reducing the cost of the insurance.

I'm in my mid thirties with quite a long time horizon to hold this for (with a small fraction of my invested assets, though not a negligible amount), have quite an appetite for risk, and am willing to ride this through the inevitable nasty drawdowns.

I'm wondering if anyone else has decided to shift in this direction, or if I'm the only one treading into the deep end of the deep end :) At the very least, I'll always have fond memories of days today.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Mickelous »

CanaBogle24 wrote: Mon Oct 12, 2020 1:56 pm It seems about half this thread (more?) has been focused on what TMF (or other bond variants of it) might yield over the next decade+ given the rate we're starting with today, and what that means for the viability of this strategy.

After some deliberation, I decided to go with an even heavier equity allocation than the original HFEA revision. I'm using 33/32/35 UPRO/TQQQ/TMF.

It seemed in most longer term backtests that equity allocations up to 65-70% tended to yield the best CAGR; however, generally the diminishing returns above ~55% weren't worth the severity of drawdowns that came with them. However, with rates where they're at now, I decided to squeeze as much juice as I can from the equity side, reducing the cost of the insurance.

I'm in my mid thirties with quite a long time horizon to hold this for (with a small fraction of my invested assets, though not a negligible amount), have quite an appetite for risk, and am willing to ride this through the inevitable nasty drawdowns.

I'm wondering if anyone else has decided to shift in this direction, or if I'm the only one treading into the deep end of the deep end :) At the very least, I'll always have fond memories of days today.
I'm 43 TQQQ / 57 EDV. Get about 1.5x returns of 100 percent QQQ plus what I get on rebalancing back into it and any gains on EDV. I was doing a little riskier stuff until I realized I'm about to put a big windfall into this in the coming months and wanted something with good potential but was rather safe at the same time.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

CanaBogle24 wrote: Mon Oct 12, 2020 1:56 pm It seems about half this thread (more?) has been focused on what TMF (or other bond variants of it) might yield over the next decade+ given the rate we're starting with today, and what that means for the viability of this strategy.

After some deliberation, I decided to go with an even heavier equity allocation than the original HFEA revision. I'm using 33/32/35 UPRO/TQQQ/TMF.

It seemed in most longer term backtests that equity allocations up to 65-70% tended to yield the best CAGR; however, generally the diminishing returns above ~55% weren't worth the severity of drawdowns that came with them. However, with rates where they're at now, I decided to squeeze as much juice as I can from the equity side, reducing the cost of the insurance.

I'm in my mid thirties with quite a long time horizon to hold this for (with a small fraction of my invested assets, though not a negligible amount), have quite an appetite for risk, and am willing to ride this through the inevitable nasty drawdowns.

I'm wondering if anyone else has decided to shift in this direction, or if I'm the only one treading into the deep end of the deep end :) At the very least, I'll always have fond memories of days today.
There's no rule that says you have to allocate 100% to the 3x ETFs. Conceptually, it's so much simpler once you realize that all you're doing is allocating between stocks and bonds and then leveraging up. Forget about the leverage temporarily. What would you do in your normal portfolio if you thought bonds were no longer such a great deal (lower returns going forward)? Presumably you'd hold more cash (or perhaps allocate some to gold). You can do the same thing here.

A lot of great work was done earlier on in this thread (and its predecessor) in modelling and replicating UPRO and TMF's precise returns, borrowing costs, etc. to make sure the products really delivered what was stated on the tin can. Other than that, the core conceptual principles can honestly be summarized in this new thread by EfficientInvestor here:

viewtopic.php?f=10&t=327599

Steve Reading correctly points out there that when leveraging up, you need to take into account the borrowing costs. Because leverage isn't completely frictionless (except for futures in a tax-advantaged account, almost everyone is borrowing at slightly more than risk free rate), there are some additional complexities.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BullHouse_BearMarket »

Jdahlen wrote: Fri Oct 09, 2020 4:50 pm $100,000 will be available for trading on Weds.

I’m looking to enter some long positions on some ETF’s and Mutual Funds.

Assuming I pick some winning strategies with positive upsides and the occasional rebalancing, what’s my potential growth looking like at around the 10 year mark?

It’s an inherited IRA, so I’d like to grow it as much as possible and not take any RMD’s until it’s well above the 300-400K mark.
Strongly consider PSLDX. I don't know your investing acumen but this fund makes it easy. It is a core holding of Hedgefundie and many others. It's average return since inception in 2007 is ~16%. There are several threads about the fund that are very informative. If you are looking to really grow that account, I'd consider it.

However, I would start a new thread about what to do with that money because taxes could kill your return if you wait 10 years to withdrawal it all at once. You may be better served withdrawing a certain percentage each year and put into a taxable account or use that money to live and boost your other retirement accounts. I'm not expert on that, but something to consider.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

CanaBogle24 wrote: Mon Oct 12, 2020 1:56 pm It seems about half this thread (more?) has been focused on what TMF (or other bond variants of it) might yield over the next decade+ given the rate we're starting with today, and what that means for the viability of this strategy.

After some deliberation, I decided to go with an even heavier equity allocation than the original HFEA revision. I'm using 33/32/35 UPRO/TQQQ/TMF.

It seemed in most longer term backtests that equity allocations up to 65-70% tended to yield the best CAGR; however, generally the diminishing returns above ~55% weren't worth the severity of drawdowns that came with them. However, with rates where they're at now, I decided to squeeze as much juice as I can from the equity side, reducing the cost of the insurance.

I'm in my mid thirties with quite a long time horizon to hold this for (with a small fraction of my invested assets, though not a negligible amount), have quite an appetite for risk, and am willing to ride this through the inevitable nasty drawdowns.

I'm wondering if anyone else has decided to shift in this direction, or if I'm the only one treading into the deep end of the deep end :) At the very least, I'll always have fond memories of days today.
You're not the only one. I am on 60% TQQQ and 40% TMF.
guillemot
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guillemot »

rchmx1 wrote: Wed Sep 23, 2020 7:03 pm
ATLGator wrote: Wed Sep 23, 2020 5:26 pm Related question - Are there any brokerages that will allow me to input my asset allocation across these ETFs and do the rebalancing for me automatically (on some schedule)? Preferably without an additional management fee.
Look into M1. I don't know if it's completely automatic, but people in this thread have mentioned M1 as offering convenient rebalancing features.
If you want to invest new savings on a set schedule, all major providers can do that. David Bach's "Automatic Millionaire" book recommends this. Honestly, you don't need to read the book, just set up automatic investing with your provider. The book goes into a lot of detail as to why, but that is the what.

For M1 they will take your investment and distribute into your pie so as to get as close to the target AA as possible. I have been doing this instead of rebalancing. Automatic rebalancing is possible with any of the M1-defined pies but for a custom pie like those discussed in this thread you need to initiate rebalancing manually.
stockmaster
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

Anyone thought of internationalizing HFEA?
Last edited by stockmaster on Wed Oct 14, 2020 12:10 pm, edited 2 times in total.
stockmaster
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

I modified the HFEA portfolio to be 2.5x leveraged with more tech focus and Chinese equity and bond exposure. Backtests give undue weighting to the trade war and Covid outbreak so I'm not too interested in them. As the only major economy that has successfully handled Covid
ATM, notwithstanding good long-term macroeconomic trends I think investing in China right now is a smart choice.

55% Equity 45% Bonds

Equity:
  • 50% Domestic
    • 25% ARKK
    • 75% FNGU
  • 50% China
    • 50% YINN
    • 50% CWEB
Bonds:
  • 25% CBON
  • 75% TMF

Internationalizing HFEA is probably a good way to (slightly) decrease risk, especially if you want to increase risk in other ways such as increasing equity % or tech exposure.
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

Has anyone implemented inverse of this strat via short bear 3x ETF (say short SPXS, short TMV)? Honestly it looks super profitable but hard to model underlying costs/margin-risks
NMBob
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NMBob »

parval wrote: Wed Oct 14, 2020 3:08 pm Has anyone implemented inverse of this strat via short bear 3x ETF (say short SPXS, short TMV)? Honestly it looks super profitable but hard to model underlying costs/margin-risks
viewtopic.php?t=288192&start=5600
NMBob
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NMBob »

parval wrote: Wed Oct 14, 2020 3:08 pm Has anyone implemented inverse of this strat via short bear 3x ETF (say short SPXS, short TMV)? Honestly it looks super profitable but hard to model underlying costs/margin-risks
viewtopic.php?t=288192&start=5600
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

NMBob wrote: Wed Oct 14, 2020 6:25 pm
parval wrote: Wed Oct 14, 2020 3:08 pm Has anyone implemented inverse of this strat via short bear 3x ETF (say short SPXS, short TMV)? Honestly it looks super profitable but hard to model underlying costs/margin-risks
viewtopic.php?t=288192&start=5600
how do you make a synthetic short 3x?

afaik for 3x long you buy ITM call at strike 2/3 of the underlying, so for the inverse do I buy ITM put at 4/3 price of underlying? dont understand those positions posted
newguy123
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by newguy123 »

been following this thread, I am wondering , is it possible for the underlying asset to go down 33% in a day ? This is what I would be afraid of, but I think it is impossible (theoretically?) from the circuit breakers etc. And theoretically if it does happen, I think money would be last of our worries haha :D
RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

newguy123 wrote: Thu Oct 15, 2020 10:18 am been following this thread, I am wondering , is it possible for the underlying asset to go down 33% in a day ? This is what I would be afraid of, but I think it is impossible (theoretically?) from the circuit breakers etc. And theoretically if it does happen, I think money would be last of our worries haha :D
My understanding is the benefit of UPRO vs TQQQ is the circuit breaker and the reset that occurs each day.

One question I haven't seen posed is why someone wouldn't just put a trailing stop loss of 20% or something along those lines. Anyone have a good reason for why someone might not want to do that? (obviously if you sell out at a 20% loss you have to decide when to get back in, but it might save you in a catastrophic crash and presumably in a tax advantaged account you can just buy back in at a pre-determined level lower than when you jumped out).
newguy123
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by newguy123 »

RovenSkyfall wrote: Thu Oct 15, 2020 12:17 pm
newguy123 wrote: Thu Oct 15, 2020 10:18 am been following this thread, I am wondering , is it possible for the underlying asset to go down 33% in a day ? This is what I would be afraid of, but I think it is impossible (theoretically?) from the circuit breakers etc. And theoretically if it does happen, I think money would be last of our worries haha :D
My understanding is the benefit of UPRO vs TQQQ is the circuit breaker and the reset that occurs each day.

One question I haven't seen posed is why someone wouldn't just put a trailing stop loss of 20% or something along those lines. Anyone have a good reason for why someone might not want to do that? (obviously if you sell out at a 20% loss you have to decide when to get back in, but it might save you in a catastrophic crash and presumably in a tax advantaged account you can just buy back in at a pre-determined level lower than when you jumped out).
Looking at the chart, these 3x etfs move fast and it is pretty hard to time, the stop loss would of got hit by an event like back in March, then the next 3 days is a face ripping rally etc would be pretty hard to get back in emotionally as no-one likes buying back in higher. Not arguing against a stop loss, but this is from my previous trading experience. Probably unlikely , but from my experience , it is almost like the market makers can see your stops and will do their best to hit it and then make it so you cannot get back in. Not saying some evil guy is out there hunting for stop losses, but a computer definitely can be programmed to view stop losses and then hunt for stop losses for profiteering, it would not surprise me if some of the market makers have programmed a computer that trades based on large stop loss hunting
RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

newguy123 wrote: Thu Oct 15, 2020 12:19 pm
RovenSkyfall wrote: Thu Oct 15, 2020 12:17 pm
newguy123 wrote: Thu Oct 15, 2020 10:18 am been following this thread, I am wondering , is it possible for the underlying asset to go down 33% in a day ? This is what I would be afraid of, but I think it is impossible (theoretically?) from the circuit breakers etc. And theoretically if it does happen, I think money would be last of our worries haha :D
My understanding is the benefit of UPRO vs TQQQ is the circuit breaker and the reset that occurs each day.

One question I haven't seen posed is why someone wouldn't just put a trailing stop loss of 20% or something along those lines. Anyone have a good reason for why someone might not want to do that? (obviously if you sell out at a 20% loss you have to decide when to get back in, but it might save you in a catastrophic crash and presumably in a tax advantaged account you can just buy back in at a pre-determined level lower than when you jumped out).
Looking at the chart, these 3x etfs move fast and it is pretty hard to time, the stop loss would of got hit by an event like back in March, then the next 3 days is a face ripping rally etc would be pretty hard to get back in emotionally as noone likes buying back in higher. Not arguing against a stop loss, but this is from my previous trading experience. Probably unlikely , but from my experience , it is almost like the market makers can see your stops and will do their best to hit it and then make it so you cannot get back in
From my understanding you would have set the stop loss on UPRO only (and TMF only) and sold pretty early by this https://finance.yahoo.com/quote/UPRO/ch ... JkYXkifX19 chart. At the peak on Feb 19th of 80.36 it would have sold by Feb 25th at 64 (even before the March crash). If you set a buy limit of 64, you could have broken even if you didnt do anything until 8/28 when it reached 64 again. That means you could have bought at any time between those two points to avoid potential losses. I am not saying anyone would have had the foresight to purchase at the low of 18, but pretty much anything after 2/25 and before 8/28 would be considered a win, and if you set a buy limit of 64, theoretically you wont have to suffer a loss (if I understand this correctly). Additionally, if UPRO ever got low enough that the fund dissolved (like that other leveraged fund did), then you would be out of it -- another potential benefit of a trailing stop loss.

In the worst case scenario you sell at a 20% loss and the market rockets up quickly and you buy back in higher with a potential "loss" (although if you put a buy at the limit of your loss hopefully you avoid this), but if you are in this for the long run, then the 20% loss may still be higher than your starting point and you are cashing in on a gain (before it gets lower) even though you are selling at a "loss".

It seems like Feb/March has shown that the LETFs dont rebound as fast as the actual market (UPRO still hasnt hit its highs in Feb, where as SP500 has already set new highs). Shouldn't this make it easier to jump back in when you have a trailing stop loss compared to a regular market?
newguy123
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by newguy123 »

RovenSkyfall wrote: Thu Oct 15, 2020 12:45 pm
newguy123 wrote: Thu Oct 15, 2020 12:19 pm
RovenSkyfall wrote: Thu Oct 15, 2020 12:17 pm
newguy123 wrote: Thu Oct 15, 2020 10:18 am been following this thread, I am wondering , is it possible for the underlying asset to go down 33% in a day ? This is what I would be afraid of, but I think it is impossible (theoretically?) from the circuit breakers etc. And theoretically if it does happen, I think money would be last of our worries haha :D
My understanding is the benefit of UPRO vs TQQQ is the circuit breaker and the reset that occurs each day.

One question I haven't seen posed is why someone wouldn't just put a trailing stop loss of 20% or something along those lines. Anyone have a good reason for why someone might not want to do that? (obviously if you sell out at a 20% loss you have to decide when to get back in, but it might save you in a catastrophic crash and presumably in a tax advantaged account you can just buy back in at a pre-determined level lower than when you jumped out).
Looking at the chart, these 3x etfs move fast and it is pretty hard to time, the stop loss would of got hit by an event like back in March, then the next 3 days is a face ripping rally etc would be pretty hard to get back in emotionally as noone likes buying back in higher. Not arguing against a stop loss, but this is from my previous trading experience. Probably unlikely , but from my experience , it is almost like the market makers can see your stops and will do their best to hit it and then make it so you cannot get back in
From my understanding you would have set the stop loss on UPRO only (and TMF only) and sold pretty early by this https://finance.yahoo.com/quote/UPRO/ch ... JkYXkifX19 chart. At the peak on Feb 19th of 80.36 it would have sold by Feb 25th at 64 (even before the March crash). If you set a buy limit of 64, you could have broken even if you didnt do anything until 8/28 when it reached 64 again. That means you could have bought at any time between those two points to avoid potential losses. I am not saying anyone would have had the foresight to purchase at the low of 18, but pretty much anything after 2/25 and before 8/28 would be considered a win, and if you set a buy limit of 64, theoretically you wont have to suffer a loss (if I understand this correctly). Additionally, if UPRO ever got low enough that the fund dissolved (like that other leveraged fund did), then you would be out of it -- another potential benefit of a trailing stop loss.

In the worst case scenario you sell at a 20% loss and the market rockets up quickly and you buy back in higher with a potential "loss" (although if you put a buy at the limit of your loss hopefully you avoid this), but if you are in this for the long run, then the 20% loss may still be higher than your starting point and you are cashing in on a gain (before it gets lower) even though you are selling at a "loss".

It seems like Feb/March has shown that the LETFs dont rebound as fast as the actual market (UPRO still hasnt hit its highs in Feb, where as SP500 has already set new highs). Shouldn't this make it easier to jump back in when you have a trailing stop loss compared to a regular market?

That is true, I am tempted to try hedgefundie's strategy with LETF's and a 20% stop loss now :sharebeer
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

A stop loss doesn't guarantee execution at a particular price. A stop loss is an act of market timing: why would you want to sell when the market is down? Does a down market predict future returns? Why 20%?

A stop loss is possibly the worst financial instrument ever invented. If you think there is a compelling reason to sell when the market goes down, set a price alert and manually insert an order to ensure there is sufficient liquidity to process your order. If you want to insure against catastrophic losses, consider choosing an asset allocation that fits for your risk tolerance.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm why would you want to sell when the market is down?
UHHH, to stop your losses, obviously. It's even in the name :mrgreen:
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm A stop loss is possibly the worst financial instrument ever invented.
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
tbfanman
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tbfanman »

Steve Reading wrote: Thu Oct 15, 2020 1:38 pm
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm why would you want to sell when the market is down?
UHHH, to stop your losses, obviously. It's even in the name :mrgreen:
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm A stop loss is possibly the worst financial instrument ever invented.
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
Just as a counter point: I do like uncorrelated’s input. As much as I enjoy reading on how people use international Direxion funds that have previously been shown to have pretty nasty friction costs, it’s also good to reminders ourselves that these ideas are fundamentally flawed and require major international outperformance to succeed. They are funds that leverage highly volatile underlyings, reset leverage daily, and do so with relatively high borrowing costs—not really a winning combination.

That said, I have about 75k in funds that average 2x leverage that’s reset daily, and those include a few thousand in EDC and DZK simply so I can enjoy the self satisfaction during those few days where they outperform URTY and UPRO.
RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm A stop loss doesn't guarantee execution at a particular price. A stop loss is an act of market timing: why would you want to sell when the market is down? Does a down market predict future returns? Why 20%?
I was using a 20% loss of the peak, is that an incorrect way to determine when the stop loss would have gone into effect?

One might want to sell when the market is down to lock in some of the gains they may have achieved the years before. After having learned as much as I could from this threat, the largest prevailing threat to me seem to be the possibility that the losses a LETF sustains may be so large the fund closes.
A down market might predict future returns https://financial-charts.effingapp.com/, but I am sure that is a different topic.
20% was just a suggestion. Each individual could choose what they are comfortable with, but the goal would be to pick a number that suggests a market crash.
A stop loss is possibly the worst financial instrument ever invented. If you think there is a compelling reason to sell when the market goes down, set a price alert and manually insert an order to ensure there is sufficient liquidity to process your order. If you want to insure against catastrophic losses, consider choosing an asset allocation that fits for your risk tolerance.
A price alert and manual insert allows for human nature to factor into the decision of whether to sell or not. It seems like having a stop loss would eliminate that. One would want to make these decisions in a time of clear-headedness and in accordance with their financial plan, not be left to make the decision when the market is falling. How will the liquidity effect your plan? If you want to stop your losses at 20% why would one want to wait for liquidity in that scenario when losses might be worse?

Your last sentence suggests it is a black and white decision. Why would this strategy not work to avoid a catastrophic loss while also leaving open the possibility of gaining most of the returns from the HFEA?
Robertsson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Robertsson »

Steve Reading wrote: Thu Oct 15, 2020 1:38 pm
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
Are you saying people shouldn't call out possibly bad ideas?
chillpenguin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chillpenguin »

Steve Reading wrote: Thu Oct 15, 2020 1:38 pm
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm why would you want to sell when the market is down?
UHHH, to stop your losses, obviously. It's even in the name :mrgreen:
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm A stop loss is possibly the worst financial instrument ever invented.
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
I definitely learn a ton by reading through all these posts, including Uncorrelated's posts. You should take into account that there are a lot of novice investors here (despite the warnings that this thread is a sketchy place for novices, the fact is I believe there are a lot of novices like myself lurking this thread). Uncorrelated in particular provides a healthy dose of rationality that helps me stay level-headed regarding some of the strategies discussed here.

Uncorrelated, if you are reading this, I just want you to know I have learned a ton by reading your posts. :sharebeer
RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

Robertsson wrote: Thu Oct 15, 2020 3:03 pm
Steve Reading wrote: Thu Oct 15, 2020 1:38 pm
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
Are you saying people shouldn't call out possibly bad ideas?
I didn't get the impression he was saying that at all.

I think what he is referring to is that Uncorrelated has proposed a utility function and anything outside of that seems to get scrutinized by Uncorrelated.
I actually really appreciate Uncorrelated's input and dont mind his criticisms (as long as they provide education). In particular, I didn't find his most recent post very helpful in that it questioned why one would want to place a stop loss, when the post he was responding to explained the rationale.

I think most people here are posting ideas they have for the exact purpose of hearing what people have to say about it -- testing out their thoughts with some smart people. It is only helpful, however if people explain why it is a bad idea.
RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

chillpenguin wrote: Thu Oct 15, 2020 3:12 pm Uncorrelated, if you are reading this, I just want you to know I have learned a ton by reading your posts. :sharebeer
1+

I have learned so much from Uncorrelated.
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

RovenSkyfall wrote: Thu Oct 15, 2020 2:23 pm
Uncorrelated wrote: Thu Oct 15, 2020 1:12 pm A stop loss doesn't guarantee execution at a particular price. A stop loss is an act of market timing: why would you want to sell when the market is down? Does a down market predict future returns? Why 20%?
I was using a 20% loss of the peak, is that an incorrect way to determine when the stop loss would have gone into effect?

One might want to sell when the market is down to lock in some of the gains they may have achieved the years before. After having learned as much as I could from this threat, the largest prevailing threat to me seem to be the possibility that the losses a LETF sustains may be so large the fund closes.
A down market might predict future returns https://financial-charts.effingapp.com/, but I am sure that is a different topic.
20% was just a suggestion. Each individual could choose what they are comfortable with, but the goal would be to pick a number that suggests a market crash.
A stop loss is possibly the worst financial instrument ever invented. If you think there is a compelling reason to sell when the market goes down, set a price alert and manually insert an order to ensure there is sufficient liquidity to process your order. If you want to insure against catastrophic losses, consider choosing an asset allocation that fits for your risk tolerance.
A price alert and manual insert allows for human nature to factor into the decision of whether to sell or not. It seems like having a stop loss would eliminate that. One would want to make these decisions in a time of clear-headedness and in accordance with their financial plan, not be left to make the decision when the market is falling. How will the liquidity effect your plan? If you want to stop your losses at 20% why would one want to wait for liquidity in that scenario when losses might be worse?

One problem is that a stop loss doesn't guarantee execution at any particular price. You can set a stop loss at 20%, and execute at a price 10% lower. If the market closes or hits a down limit, your order might fill partially or not at all.

If you are a retail investor you do never want to trade when the liquidity is bad. A stop loss like this almost guarantees execution at a time when the liquidity is bad. If the liquidity is bad, the only reasonable thing to do is to go back to sleep. This rarely happens (about once every 5 years), but if it happens you do not want to be there.

The worst thing that can happen is that the liquidity is bad due to general market conditions (i.e. 9/11 or banking liquidity crisis). Then some idiot sells 1 share of UPRO far under fair value, which triggers your stop loss, which causes you to sell far under fair value. If you set a price alert instead of a stop loss, you will avoid all these problems. And since we both lack the knowledge required to make informed buy/sell decisions on this time scale, it really doesn't matter whether you sell immediately after a 20% drop or 5 days later.


According to this paper there is no evidence a market direction predicts future returns: Time-Series Momentum: Is It There?. You might as well sell on a fair dice roll.
Your last sentence suggests it is a black and white decision. Why would this strategy not work to avoid a catastrophic loss while also leaving open the possibility of gaining most of the returns from the HFEA?
Because this contradicts efficient markets. HFEA has high expected return because the market compensates you for taking extreme risks. It is not possible to lower the risk of this strategy at the same expected return (it is possible to obtain the same expected return by taking other risks, such as value risk, which may be preferable to you. But strictly speaking, this is not lower risk). What you attempt to do is simply impossible unless markets are widely inefficient.


If your net worth decreases, it might be worth considering a different asset allocation (for example, if your risk aversion can be characterized as decreasing absolute risk aversion). This decision depends on your total net worth, not on the market gyrations of a single fund.


If you really want to protect against downside risks, purchase call options instead of using UPRO and a stop loss. In addition to the fact this does actually protect you against some of the risks you mentioned, it's also cheaper and doesn't contradict several fundamental mathematical and economical theories.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

Steve Reading wrote: Thu Oct 15, 2020 1:38 pm On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
Because you're wrong to assume that participants aren't taking this seriously. I take the details of this strategy very seriously. I have dedicated 100% of my portfolio to this strategy, and I would probably be much worse off in terms of utility if Uncorrelated hadn't contributed to this thread. In fact, I could argue that I have personally derived more utility from Uncorrelated's contributions than from the Excellent Adventure itself. Also, I wouldn't call any of his comments "rhetoric." If anything, they are anti-rhetoric. At least from what I've seen, it's the groundless regurgitation of rhetoric to which he responds most, typically with well-researched charts, statistics, and other hard evidence. Plus, most of his advice applies not just to the Excellent Adventure but to all portfolios such that both participants and onlookers stand to benefit.

I, for one, am deeply grateful for the thoughtful criticism that Uncorrelated continues to provide. Not only has he drastically improved the utility of my investments, but he has also deeply improved my understanding of economic and financial theory, significantly reinforcing my confidence in my investment decisions.

EDIT: One more point. This is a forum which actively facilitates intellectual debate, and at least in my case, it's what I'm hear for. Criticizing "fun" ideas is just as much a part of the actual fun as presenting those "fun" ideas in the first place. Moreover, those who make irrational decisions like, for example, "bucketing" or choosing an allocation "because HEDGEFUNDIE said so" stand to benefit from recognizing the error of their ways and making rational decisions instead. Believe it or not, some of these people aren't just "having fun with it." Some of them genuinely believe their flawed ideas while failing to acknowledge those flaws. This is dangerous, and Uncorrelated's contributions have been very helpful in alleviating that danger.
gokuisthebest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gokuisthebest »

sweetnpsycho wrote: Sat Sep 19, 2020 3:08 pm
Hydromod wrote: Sat Sep 19, 2020 1:25 pm
sweetnpsycho wrote: Fri Sep 18, 2020 8:49 pm 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.
If I start with 55% UPRO / 45% TMF today(16 Oct 2020), would the next rebalance day for me be Jan 01 2021 using the previous day's latest price? I wonder what happens if someones rebalance day is one of the days like feb 24-26 where it dropped ~9% on the same day. The % keeps changing on the rebal day prices but should i stick with the previous closing prices?
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kerstverlichting
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kerstverlichting »

gokuisthebest wrote: Thu Oct 15, 2020 4:47 pm
sweetnpsycho wrote: Sat Sep 19, 2020 3:08 pm
Hydromod wrote: Sat Sep 19, 2020 1:25 pm
sweetnpsycho wrote: Fri Sep 18, 2020 8:49 pm 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.
If I start with 55% UPRO / 45% TMF today(16 Oct 2020), would the next rebalance day for me be Jan 01 2021 using the previous day's latest price? I wonder what happens if someones rebalance day is one of the days like feb 24-26 where it dropped ~9% on the same day. The % keeps changing on the rebal day prices but should i stick with the previous closing prices?
You can do same day rebalancing, right before the close, to avoid this issue (that's what I'm doing myself, with adaptive asset allocation). As a side note, the market is closed on Jan 1, so the next possible date would be Mon Jan 4.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

gokuisthebest wrote: Thu Oct 15, 2020 4:47 pm
If I start with 55% UPRO / 45% TMF today(16 Oct 2020), would the next rebalance day for me be Jan 01 2021 using the previous day's latest price? I wonder what happens if someones rebalance day is one of the days like feb 24-26 where it dropped ~9% on the same day. The % keeps changing on the rebal day prices but should i stick with the previous closing prices?
There is luck involved in rebalancing timing and it’s one of the things we have to accept. There’s no need for everybody to do it a certain way, but make no mistake, we’ll look back on it and see potentially large effects.
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gokuisthebest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gokuisthebest »

firebirdparts wrote: Thu Oct 15, 2020 7:37 pm
gokuisthebest wrote: Thu Oct 15, 2020 4:47 pm
If I start with 55% UPRO / 45% TMF today(16 Oct 2020), would the next rebalance day for me be Jan 01 2021 using the previous day's latest price? I wonder what happens if someones rebalance day is one of the days like feb 24-26 where it dropped ~9% on the same day. The % keeps changing on the rebal day prices but should i stick with the previous closing prices?
There is luck involved in rebalancing timing and it’s one of the things we have to accept. There’s no need for everybody to do it a certain way, but make no mistake, we’ll look back on it and see potentially large effects.
yea i agree with you. all these backtests looks like they are taking the end of the day price and instant rebalancing which can never be achieved with manual rebalancing. atleast for me due to timezone difference i cant trade at the end of the day in usa. some user previously posted images of 20 runs avg. for various start dates from 1985-1986 and the resulting cagr/sd/drawdown has a wide range.
i was hoping if anyone is referring to a specific time/day when they meant rebalance. lets see who gains the most/loses the least in few yrs.
newguy123
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by newguy123 »

I have a question about a catastrophe loss risk

Which is more risky

100% in a stock like Apple or Microsoft (buy and hold for 10 years ) with no stop loss

Or

100% in tqqq or upro for 10 years with a 20% stop loss ?


For some reason I am thinking all in one stock is less risky and probably would have better returns . The biggest risk would be bankruptcy for the single stock
hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 »

gokuisthebest wrote: Thu Oct 15, 2020 4:47 pm
sweetnpsycho wrote: Sat Sep 19, 2020 3:08 pm
Hydromod wrote: Sat Sep 19, 2020 1:25 pm
sweetnpsycho wrote: Fri Sep 18, 2020 8:49 pm 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.
If I start with 55% UPRO / 45% TMF today(16 Oct 2020), would the next rebalance day for me be Jan 01 2021 using the previous day's latest price? I wonder what happens if someones rebalance day is one of the days like feb 24-26 where it dropped ~9% on the same day. The % keeps changing on the rebal day prices but should i stick with the previous closing prices?
A few pages ago and then a many pages more ago it had been established that quarterly rebalancing at the end/beginning of a quarter (=real quarter, not three month after your individual start date "quarter") seems to be optimal.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Robertsson wrote: Thu Oct 15, 2020 3:03 pm
Steve Reading wrote: Thu Oct 15, 2020 1:38 pm
On a more serious note, you do realize this thread isn't actually that serious right? Most people using these portfolios are putting 1-5% of their money on it. They're having fun with it. Backtesting and overfitting to see what number of days is best for inverse volatility. Or what moving averages to use to get in and out. They add Chinese stocks 3x leveraged ETFs, or only use NASDAQ. They use mental accounting ("I will not add or take out money from the Adventure") when they could achieve the same allocation, more efficiently, if they considered the entire portfolio. They're deriving utility from this in other words.

I mean, why do you drop into this thread and comment on how terrible each new idea is? Maybe I'm the only one thinking this and everyone else actually enjoys the content and rhetoric in your comments in this thread. If so, then disregard me and just keep firing away mate.
Are you saying people shouldn't call out possibly bad ideas?
I'm saying Uncorrelated is harsh in the way he does that. I've learned plenty from him too, I literally point-blank ask him questions.

It sounds like people are fine with it, so just disregard my comment. I'm not in the Adventure any ways. If you're serious about the investment and putting serious money in it, then Uncorrelated does well by telling you exactly why what you're doing is terrible.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
zie
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zie »

cos wrote: Thu Oct 15, 2020 4:14 pm I have dedicated 100% of my portfolio to this strategy, and I would probably be much worse off in terms of utility if Uncorrelated hadn't contributed to this thread.
If you are willing to share(and probably in a diff. thread) it would be interesting at least for me(but hopefully others also), to learn more about your approach and how it's going for you so far. i.e. a Cos's excellent adventure. Especially since you are all in 100%, that's very bold!
rchmx1
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

The only thing I'd say about uncorrelated is that I wish he'd consider the breadth of his audience a bit more. By which I mean, he tends to write his posts to an audience already well-versed in technical finance-related jargon. That can make some of what he writes rather implacable to someone like me, who isn't already well-versed in such jargon. I appreciate that there's a balance, jargon is a shorthand and so helps reduce the amount of time it takes to express yourself in matters of complexity. But I do often find myself wishing he'd take a bit more time to break down what he's wanting to say in more common English, as opposed to relying so much on jargon to do the work. Other than that, I've also found great value in his contributions, and even if I don't fully understand everything he writes, I view his content like a sign post, pointing me in the direction of the things I need to better understand.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

zie wrote: Fri Oct 16, 2020 12:24 pm
cos wrote: Thu Oct 15, 2020 4:14 pm I have dedicated 100% of my portfolio to this strategy, and I would probably be much worse off in terms of utility if Uncorrelated hadn't contributed to this thread.
If you are willing to share(and probably in a diff. thread) it would be interesting at least for me(but hopefully others also), to learn more about your approach and how it's going for you so far. i.e. a Cos's excellent adventure. Especially since you are all in 100%, that's very bold!
I don't really have the time to do a write-up worthy of its own thread, but I can give you a summary. In short, I maintain a large UPRO allocation, but I'm slowly replacing TMF with international factor funds. Why? Because while HFEA largely satisfies my utility function as a γ ≈ 1 investor, it does so fairly inefficiently given my confidence in the evidence for factors and international diversification. I'm also too lazy to use options, much to my own detriment.

If you're interested in building a similar portfolio for yourself I highly recommend reading through Uncorrelated's "A mean variance framework for portfolio optimization" over here: viewtopic.php?f=10&t=322366

As for how it's going, I've been ~100% invested in HFEA or some variant thereof for about a year now, making regular contributions. So far, so good, but it all means nothing given the long-term nature of investing.
keith6014
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by keith6014 »

How does one implement the adaptive strategy?
calcada
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by calcada »

MotoTrojan wrote: Sat Oct 12, 2019 12:11 pm It is all about the ratio of volatility of equity to volatility of treasuries. TMF moves more than EDV. The best way to think about it is that 55/45 UPRO/TMF and 43/57 UPRO/EDV are the same portfolio (same ratio of volatility over the long run) but the 55/45 UPRO/TMF one has ~28% more leverage overall. More leverage does not always mean more return, and it does always mean more risk.

1st I got the long-term volatility of simulated UPRO, TMF, and EDV from 1955-2018 using the Simba spreadsheet. You could do the same using Portfolio Visualizer but I don't have simulated EDV data back since VEDTX inception.

Then I took (volatility_UPRO * 0.55) / (volatility_TMF * 0.45) and set that as my equity to bond volatility ratio. In this case the volatility of the bond fund is a proxy for duration as well.

Then I took (volatility_UPRO * 0.XX) / (volatility_EDV * (1-0.XX)) and iterated on XX until the ratio was equal to the 55/45 UPRO/TMF option.
How did you calculate that 55/45 UPRO/TMF has ~28% more leverage than 43/57 UPRO/EDV? Just by comparing standard deviations of the portfolios?

What did you take as the long-term volatility of simulated UPRO, TMF, and EDV? I used 45.27% for UPRO, 29.79% for TMF and 21.63% for EDV and found the allocation to be 47/53 UPRO/EDV instead of 43/57 UPRO/EDV.

Have you considered the approach of matching the overall portfolio volatility of 55/45 UPRO/TMF with that of UPRO/EDV instead of matching their equity to bond volatility ratios? Assuming 55/45 UPRO/TMF has a long-term volatility of 27%, we get a similar long-term volatility with 60/40 UPRO/EDV. What are your thoughts on this approach and on 60/40 UPRO/EDV?

Is matching the equity to bond volatility ratio the better approach than matching overall volatility?
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