HEDGEFUNDIE's excellent adventure Part II: The next journey

[kerstverlichting]

Hi everyone, I have created a guide on how to invest in U.S. domiciled ETFs like UPRO/TQQQ/TMF from Europe as well, so that people can participate n Hedgefundie's Excellent Adventure.

Basically you use Tastyworks to open an account, and transfer via CurrencyFair. Here you can find the full instrctions:
https://europoor.com

---

I also updated my file (v5.0 now) to include some new features:
Made the data refresh check throw an error only if any of the tickers chosen by the user are affected.
Added vanilla 60:40 and 55:45 strategies, easy way to calculate how many shares to buy by simply providing your portfolio value.
Added "a Simple Leveraged Volatility Targeted Balanced Allocation Strategy" from https://wantelbos.github.io/ I copied over the whole logic to Excel. Useful should the website ever not be available. Seems to be a very interesting strategy that I know a few people here are utilizing. For more info, check the website.
Some other minor improvements, including small layout changes.

No new tickers this time. I'm wary of adding too many (Yahoo will start acting up then and not all will refresh anymore). Beside, all the major ones are available already, and instructions to add others are in the file should you require it. Have added the VIX though, to make the wantelbos/Simple Leveraged Volatility Targeted Balanced Allocation Strategy work.

Preview:


Download (1.3MB):
https://gofile.io/d/Y8612N
https://www.filehosting.org/file/detail ... 6/AAA.xlsx

@coingaroo, would it also be possible for you to create a mirror again on your hosting?

[RovenSkyfall]

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.

Okay well that makes sense. Thank you for explaining the potential pit fall of a stop loss order. I will have to see if Fidelity has an option for a % stop loss notification rather than an order.

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.

Thank you for the article. I am quick to admit my unfavorable position on the Dunning-Kruger curve, but I dont know how relevant this article is to what I was suggesting (see below). We may be talking past each other, or I may be missing your point altogether. I was discussing stop losses and this seems to be discussing 12-month TSM (is there a particular part I am missing). While it is very informative, I dont have enough command of the content to be able to discriminate whether any particular article is methodologically superior to the prior ones it is refuting, but I will appeal to authority and trust your seal of approval.

The point I was hoping to convey is that, as we have seen with the Feb/March crash, the LETF fell much faster (expected) than the benchmark that if follows, but has still yet to recover from its starting point unlike the benchmark it follows. Since LETFs reset daily, it makes sense that they will not be able to recover as quickly. For this reason, my thought experiment was something along the following: although in a typical market, trying to time the market in a crash can leave you in a worse position (due to quick recoveries and having to buy back in at a higher price leading to a paper loss whereas staying in would have not been a realized loss), LETFs seems to recover a lot slower and that may actually decrease the chances of paper losses compared to a normal efficient market. For point of example are simulated response to a downturn and upturn below for fake benchmark (3200) and LETF (58) with made up starting numbers and market daily returns.

-5% -4% -6% -8% 2% 6% 2% 10% 3% % of Beginning
3200 3040.00 2918.40 2743.30 2523.83 2574.31 2728.77 2783.34 3061.68 3153.53 0.99
58 49.30 43.38 35.57 27.04 28.66 33.82 35.85 46.60 50.79 0.88

Now I know that this math has primarily been used to argue for a type of "unseen" inability for LETF to perform as well as people expect, but that is not why I am using it. I am using it to show that in a tax advantaged account that one has much more time to get back into the market than with a normal benchmark (as I pointed out earlier that someone who jumped out at the beginning of the crash would have had almost 6 months to get back in without a loss) and this may be why it might make sense to try and "time a crash" with LETFs.

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.

Could it be the case that although markets as a whole are efficient, LETFs are not efficient?

The market compensates one for taking extreme risk with regards to the beta, but does the market compensate for the independent risk of LETFs that they can be dissolved if they incur too large of losses (like some in the past have)? I will have to defer the answer to that question to you. The particular risk with HFEA that the proposed strategy might prevent is the whole loss of the UPRO (or TQQQ) aspect if the market drops enough to dissolve the fun. I find it hard to imagine that the markets takes into consideration this risk and compensates for it. The volatility in itself is not what this strategy would be trying to avoid.

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.

Agree and I appreciate your prior posts on this. This is not a significant portion of my portfolio and merely trying to avoid a full loss of tax advantage accounts and why I posited the idea.

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.

If you can explain this in more detail I might consider, but I have a feeling if one incorporates the individual time capital required this might not actually be "cheaper". The primary risk I am suggesting avoiding is not being in UPRO when it hits rock bottom and dissolves. The unanticipated potential upside I was suggesting is that one may actually be able to secure a gain when they get back in as they have a longer duration to capitalize on compared to the benchmark.

Looking forward to your response!

[stockmaster]

Baseline - If we use 55/45 UPRO / TMF from 10/2011 till now the CAGR is 31.25%. If we use 48/44/8 UPRO/TMF/XVZ the CAGR is 27.89%. So the hedge is costing us 3.36% CAGR. In dollar terms on a 100k account, the cost of allocating 8% to UVX since 10/2011 is $248k. That's a significant cost but if it saves us in a Black Swan it might be worth it.

First some observations about XVZ
1. Look at the XVZ volume - it's almost nonexistent and has a spread of 0.25.
2. When everything was getting killed in 3/20 the high was only 20% higher than it is now (so not much protection). Is that a sufficient enough hedge? Let's see what the hedge would be worth on 3/16/2020.

Put 8k in UVX starting on 10/2011 (per your proposed start date). Model it in PV. On 2/28/2020 the XVZ hedge would be worth $2,552 and have a price of $20.12 / share and we would have 127 shares. On 3/16 the price per share rose to $42.13 and the XVZ hedge would be worth it would be worth $5,343!

The UVX hedge cost you $243k in performance and provided absolutely no relief in March 2020.

Now let's model the VIX Option Hedge. In PV model the 55/45 UPRO/TMF allocation with a 0.3% withdrawal each month to pay for the hedge. The CAGR is 26.64% (less than the UVX Hedge). The hedge cost us $327k versus the straight 55/45 UPRO/TMF HFEA!! That seems heavy!! Was it worth it?

Remember how we construct the hedge. Take 30 basis point (0.3%) per month and buy 10 delta VIX call options 120 days to expiration.

In 11/2019 we buy the 10 delta call options 120 days out (March 2020 expiration). We repeat that each month (In December 2019 we buy the 10 delta April expiration VIX calls with using the 0.3% we withdraw each month. Repeat for January and February buying the May and Jun 10 delta VIX calls respectively.

On 3/16/2020 the VIX Hedge was worth $736,193! That is a hedge that costs money but saves us in a Black Swan. Cash-out the hedge and stay the course. The portfolio would be worth $1.59 million versus the straight 55/45 HFEA with a value of $1.182 million!

I pick the VIX option hedge. No brainer.

PS - to perform the modeling I used PV for the UPRO/TMF and XVZ allocation model. For the VIX options, I used the Thinkorswim analyze function to model the purchase and pricing of the options. I put the results in excel to do the final computation. I believe this is a major protection to using the HFEA 55/45 UPRO model in order to protect the leveraged SP500 ETF against binary events such as the 3/20 major drawdown and come out ahead.

I would appreciate it if any other members here would double check my logic, modeling and math.

Hey, I might take a few days between posts, but I do think your method is very interesting. It seems to be the equivalent of maxing out leverage far more than any available VIX ETF. I'll look into it more but unfortunately I'm rather busy the next few days.

A couple quick questions/comments though...

The low trade volume of XVZ is a good point, and AFAIK bid/ask spread isn't modelled correctly in PV. There are other VIX ETFs with higher volumes of course but all of them give worse performance than XVZ for long-term holds.

You mention UVX a few times. Did you mean XVZ?

When you say on 3/16/2020 the hedge was worth $736k, was that the total profit from the options? Or was that the total return of your hedged portfolio? How much money was invested in the options to begin with?

How exactly do you set up automatic options buying? Or do you do that manually?

Do you happen to know your portfolio's sharpe ratio? Here's an investopedia article on how to do it in excel.

Also, this thread is pretty terrible for asking for advice since it's so long and most posters here are in the middle of some 3-week debate haha... You could try here instead.

[stockmaster]

Hi everyone, I updated my file (v5.0 now) to include some new features:
Made the data refresh check throw an error only if any of the tickers chosen by the user are affected.
Added vanilla 60:40 and 55:45 strategies, easy way to calculate how many shares to buy by simply providing your portfolio value.
Added "a Simple Leveraged Volatility Targeted Balanced Allocation Strategy" from https://wantelbos.github.io/ I copied over the whole logic to Excel. Useful should the website ever not be available. Seems to be a very interesting strategy that I know a few people here are utilizing. For more info, check the website.
Some other minor improvements, including small layout changes.

No new tickers this time. I'm wary of adding too many (Yahoo will start acting up then and not all will refresh anymore). Beside, all the major ones are available already, and instructions to add others are in the file should you require it. Have added the VIX though, to make the wantelbos/Simple Leveraged Volatility Targeted Balanced Allocation Strategy work.

Preview:


Download (1.3MB):
https://gofile.io/d/Y8612N
https://www.filehosting.org/file/detail ... 6/AAA.xlsx

@coingaroo, would it also be possible for you to create a mirror again on your hosting?

I've tried using this a couple times and it doesn't work. I'm on linux and tried both libreoffice and google sheets. Does it require MS Excel?

Also, I checked the website for the "Simple Leveraged Volatility Targeted Balanced Allocation" strategy and IDK why he calls it that. VFITX is an intermediate-term bond fund, not VIX.

[perfectuncertainty]

Hey, I might take a few days between posts, but I do think your method is very interesting. It seems to be the equivalent of maxing out leverage far more than any available VIX ETF. I'll look into it more but unfortunately I'm rather busy the next few days.

A couple quick questions/comments though...

The low trade volume of XVZ is a good point, and AFAIK bid/ask spread isn't modelled correctly in PV. There are other VIX ETFs with higher volumes of course but all of them give worse performance than XVZ for long-term holds.

You mention UVX a few times. Did you mean XVZ?

When you say on 3/16/2020 the hedge was worth $736k, was that the total profit from the options? Or was that the total return of your hedged portfolio? How much money was invested in the options to begin with?

How exactly do you set up automatic options buying? Or do you do that manually?

Do you happen to know your portfolio's sharpe ratio? Here's an investopedia article on how to do it in excel.

Also, this thread is pretty terrible for asking for advice since it's so long and most posters here are in the middle of some 3-week debate haha... You could try here instead.

Yes, I did mean XVZ. Not UVZ.

On 3/16 the $736k was the value of the hedge only. The returns for HFEA were in addition.

I built the model based on your inception date of 10/2011. Reread my post. But in brief:

The options in the hedge are bought manually. Once a month. Net Liq x 0.003 = X. Find the 10 delta VIX calls 120 days to expiration and get the price. Divide X by that number to give the number of options for the month. Once this is running you will always have 3 months in play. In March of 2020, the 4 months of options in play would have been Mar, Apr, May, Jun which were purchased in Nov, Dec, Jan, and Feb. The Net Liq of HFEA in Feb would have been around 880k and you would have spent 2.6k for each of the months of VIX options (just under 11k).

Like you, I'm very busy and building the full model is a fair amount of work using multiple tools. I'm fairly confident in my numbers, but I'll take some time and build all this out in Excel using PV and TOS when I have some time.

[Uncorrelated]

Thank you for the article. I am quick to admit my unfavorable position on the Dunning-Kruger curve, but I dont know how relevant this article is to what I was suggesting (see below). We may be talking past each other, or I may be missing your point altogether. I was discussing stop losses and this seems to be discussing 12-month TSM (is there a particular part I am missing). While it is very informative, I dont have enough command of the content to be able to discriminate whether any particular article is methodologically superior to the prior ones it is refuting, but I will appeal to authority and trust your seal of approval.

Investing is selecting an asset allocation that fits your risk tolerance and expected return assumptions. You indicated that you would like to sell under certain conditions, there are two rational reasons for this: your risk tolerance changed, or your expected return assumptions changed. The latter would lead to a momentum strategy, which do not work according to the paper I linked.

The former can be rational, but it is very difficult to execute correctly. It is so difficult that there is only one method that I can recommend and that is lifecycle investing. There are a lot of ways you can mess up and and up with a portfolio that is not only inefficient at a single point in time, but also inefficient over time.

The point I was hoping to convey is that, as we have seen with the Feb/March crash, the LETF fell much faster (expected) than the benchmark that if follows, but has still yet to recover from its starting point unlike the benchmark it follows. Since LETFs reset daily, it makes sense that they will not be able to recover as quickly. For this reason, my thought experiment was something along the following: although in a typical market, trying to time the market in a crash can leave you in a worse position (due to quick recoveries and having to buy back in at a higher price leading to a paper loss whereas staying in would have not been a realized loss), LETFs seems to recover a lot slower and that may actually decrease the chances of paper losses compared to a normal efficient market. For point of example are simulated response to a downturn and upturn below for fake benchmark (3200) and LETF (58) with made up starting numbers and market daily returns.

-5% -4% -6% -8% 2% 6% 2% 10% 3% % of Beginning
3200 3040.00 2918.40 2743.30 2523.83 2574.31 2728.77 2783.34 3061.68 3153.53 0.99
58 49.30 43.38 35.57 27.04 28.66 33.82 35.85 46.60 50.79 0.88

Now I know that this math has primarily been used to argue for a type of "unseen" inability for LETF to perform as well as people expect, but that is not why I am using it. I am using it to show that in a tax advantaged account that one has much more time to get back into the market than with a normal benchmark (as I pointed out earlier that someone who jumped out at the beginning of the crash would have had almost 6 months to get back in without a loss) and this may be why it might make sense to try and "time a crash" with LETFs.

This is ordinary volatility decay, and occurs in all products, not just LETF's. If this is something you worry about, the correct solution is to select a more conservative asset allocation.

Timing this effect is as difficult as ordinary market timing. After all, you're trying to exploit time-dependent variations in expected return or risk, which are very difficult to predict and even more difficult to exploit.

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.

Could it be the case that although markets as a whole are efficient, LETFs are not efficient?

The market compensates one for taking extreme risk with regards to the beta, but does the market compensate for the independent risk of LETFs that they can be dissolved if they incur too large of losses (like some in the past have)? I will have to defer the answer to that question to you. The particular risk with HFEA that the proposed strategy might prevent is the whole loss of the UPRO (or TQQQ) aspect if the market drops enough to dissolve the fun. I find it hard to imagine that the markets takes into consideration this risk and compensates for it. The volatility in itself is not what this strategy would be trying to avoid.

You want to select the best asset allocation available to you. If that asset allocation includes an LETF, choose that. If your favorite LETF is no longer available, pick something else. There is no reason to avoid purchasing an LETF because it might dissolve in the future. The correct asset allocation for today does not depend on the products that are available tomorrow (ignoring taxes and transaction fees). This is known as Bellman's principle of optimality, a very fundamental theory in optimization.

LETF's may look like complicated products, but the implementation by banks is straightforward. You can count on them being extremely efficient. If they were not efficient the banks would lose a lot of money very quickly as sophisticated investors try to exploit these inefficiencies.

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.

If you can explain this in more detail I might consider, but I have a feeling if one incorporates the individual time capital required this might not actually be "cheaper". The primary risk I am suggesting avoiding is not being in UPRO when it hits rock bottom and dissolves. The unanticipated potential upside I was suggesting is that one may actually be able to secure a gain when they get back in as they have a longer duration to capitalize on compared to the benchmark.

Looking forward to your response!

I was under the impression that you wanted to protect yourself against losing too much money, options are the right choice for that application because they are essentially insurance products, priced at efficient market rates. Implementing this yourself (efficiently) is very difficult. It is even more difficult to come up with a good justification why this would be useful. I have mentioned lifecycle investing earlier, that strategy increases the equity allocation as your net worth decreases.

If you want to protect against the ETF dissolving, then I wouldn't worry about that. If UPRO dissolves, you can always replicate UPRO with options or futures. I don't see any real risk here.

If you want to protect yourself against the ETF dissolving due to a 100% loss, then pick a more conservative asset allocation. Dynamically varying the asset allocation over time is not a good solution, It's almost always a bad solution.

[drock]

Hey, I might take a few days between posts, but I do think your method is very interesting. It seems to be the equivalent of maxing out leverage far more than any available VIX ETF. I'll look into it more but unfortunately I'm rather busy the next few days.

A couple quick questions/comments though...

The low trade volume of XVZ is a good point, and AFAIK bid/ask spread isn't modelled correctly in PV. There are other VIX ETFs with higher volumes of course but all of them give worse performance than XVZ for long-term holds.

You mention UVX a few times. Did you mean XVZ?

When you say on 3/16/2020 the hedge was worth $736k, was that the total profit from the options? Or was that the total return of your hedged portfolio? How much money was invested in the options to begin with?

How exactly do you set up automatic options buying? Or do you do that manually?

Do you happen to know your portfolio's sharpe ratio? Here's an investopedia article on how to do it in excel.

Also, this thread is pretty terrible for asking for advice since it's so long and most posters here are in the middle of some 3-week debate haha... You could try here instead.

Yes, I did mean XVZ. Not UVZ.

On 3/16 the $736k was the value of the hedge only. The returns for HFEA were in addition.

I built the model based on your inception date of 10/2011. Reread my post. But in brief:

The options in the hedge are bought manually. Once a month. Net Liq x 0.003 = X. Find the 10 delta VIX calls 120 days to expiration and get the price. Divide X by that number to give the number of options for the month. Once this is running you will always have 3 months in play. In March of 2020, the 4 months of options in play would have been Mar, Apr, May, Jun which were purchased in Nov, Dec, Jan, and Feb. The Net Liq of HFEA in Feb would have been around 880k and you would have spent 2.6k for each of the months of VIX options (just under 11k).

Like you, I'm very busy and building the full model is a fair amount of work using multiple tools. I'm fairly confident in my numbers, but I'll take some time and build all this out in Excel using PV and TOS when I have some time.

Quick question...when you say net liq value that you base your options purchase on, do you mean your net account value or the total amount of exposure you have. For instance if you had 100k and it was half and half split between upro and tmf you'd really have 150k stock exposure and 150k treasury exposure for a total of 300k exposure. Do you base your calcs on 100, 150, or 300k in that situation?

Thanks for the idea...I'm very interested in it so far.

[kim.gold]

As someone who started their adventure recently, I’m strongly leaning towards just pulling out and waiting until TMF comes back to earth. Maybe once it hits 28. It’s odd that if just feels too risky because of the bond portion. Going to try to short tmf until January too.

What are some temporary alternative strategies to keep a decent amount of money in upro? Buying the dip, spxs calls?

Buy deep in the money SPY call (10 percent deep) expiring 18 months from now. That will give you a 5x exposure at $5,800 (Today's price)?

18 months 10% deep Spy call is the March 18,2022 at a 295 strike price. It will cost you $62 per contract and as of today's close on the date of expiration SPY you would break even if SPY is at 357.08. The probability of profit at expiration is 40% according to the options analyzer I checked.

So, 60% chance to lose your $6200

[perfectuncertainty]

Quick question...when you say net liq value that you base your options purchase on, do you mean your net account value or the total amount of exposure you have. For instance if you had 100k and it was half and half split between upro and tmf you'd really have 150k stock exposure and 150k treasury exposure for a total of 300k exposure. Do you base your calcs on 100, 150, or 300k in that situation?

Thanks for the idea...I'm very interested in it so far.

Exposure? Yes - I'm discussing the HFEA portfolio (55/45 UPRO/TMF).

I will report back with a $100k starting allocation and document the prep and assumptions and how I arrive at them.

[perfectuncertainty]

Here is a detailed description of how HFEA (55/45 UPRO/TMF) portfolio has performed with the protection of a VIX options hedge. The numbers are refined from my prior post which overstated the performance. The reason for the overstatement was due to the fact that I did not derive the current monthly value of HFEA to be used as a basis for purchasing the monthly VIX option tranches that would be in effect in mid-March 2020. Nevertheless, the performance of HFEA with the protection of the VIX options hedge was substantially better than the performance of HFEA without the benefit of the insurance that was in effect since the beginning of the model.

Background Setup.
Start Date of 9/1/2011 based on stockmaster's question on page 132 of this thread.
Starting Capital: 100,000
Allocation: 55% UPRO / 45% TMF
UPRO Peak is the focus and occurred on 2/19/2020

VIX Hedge Setup.
We start with the 100,000 in starting capital
Allocate 0.3% of Net Liq each month and buy 10 delta VIX call options ~ 120 days to expiration. Purchase this on the 3rd Friday of the month.
This created 4 tranches of VIX call options that would be in effect during mid-March 2020.

The tranches were as follows:
11/15/2019 Net Liq: 648,793 to purchase VIX call options expiring on 3/18/2020. Strike price 45.00 Cost per option 0.300. Number purchased 6,400.
12/15/2019 Net Liq: 653,806 to purchase VIX call options expiring on 4/15/2020. Strike price 45.00 Cost per option 0.275. Number purchased 7,100.
01/15/2020 Net Liq: 718,380 to purchase VIX call options expiring on 5/20/2020. Strike price 40.00 Cost per option 0.200. Number purchased 10,700.
02/15/2020 Net Liq: 778,954 to purchase VIX call options expiring on 6/17/2020. Strike price 42.50. Cost per option 0.200. Number purchased 8,400.
Total Cost of the VIX Options Hedge in effect in mid-March 2020: 8,399.80

HFEA Value as of2/19/2020.
As of 2/19/2020 HFEA with the VIX Hedge applied each month since 9/1/2011 was worth 778,954.40.

This is derived using PV and daily prices from TradingView charts as follows:
PV Model with 0.3% monthly withdrawal LINK
As of 1/31/2020 HFEA with VIX Hedge applied had a Final Balance of 718,380
Price UPRO on 1/31/2020 = 69.37
Price of TMF on 1/31/2020 = 31.99
UPRO 55% allocation = 5,696 shares
TMF 45% allocation = 10,105 shares
Price of UPRO on 2/19/2020 = 80.36
Price of TMF on 2/19/2020 = 31.79
Using the # of shares for each calculated above the value for HFEA with the monthly 0.3% allocation for the VIX hedge is 778,954.40.

Performance During Mid-March 2020 for HFEA and the VIX Option Hedge
By 3/9/2020, HFEA declined by 3.57% from the 2/19 highpoint to a value of 751,182.60.
By 3/13/2020, HFEA declined by 25.64% from the 2/19 highpoint to a value of 579,204.14.
By 3/16/2020, HFEA declined by 26.86% from the 2/19 highpoint to a value of 569,763.08.

By 3/9/2020, the VIX hedge increased by 1242.53% to a value of 104,370.00.
By 3/13/2020, the VIX hedge increased by 2549.63% to a value of 214,164.00.
By 3/16/2020, the VIX hedge increased by 6912.03% to a value of 580,597.00.

By 3/9/2020, HFEA combined with the VIX hedge increased by 9.83% to a value of 855,552.60.
By 3/13/2020, HFEA combined with the VIX hedge increased by 1.85% to a value of 793,368.14.
By 3/16/2020, HFEA combined with the VIX hedge increased by 47.68% to a value of 1,150,360.08.

Point of Reference
As a point of reference if one had not utilized any hedging HFEA would have been worth 1,055,118.98 on 2/19/2020 but worth 771,762.57 on 3/16/2020.
This model and analysis does not include any application of hedging comparison for declines in HFEA in August 2015, February of 2018, and December 2018 even though the costs of the protection are modeled as being in effect at that time. The VIX hedge would have provided substantial benefit in 2008 and contained any drawdown. And again in 2010 and 2011 - I have not modeled those periods to ascertain how effective the insurance would have been.

Here is my spreadsheet with the analysis for 3/2020 LINK.

[kerstverlichting]

Hi everyone, I updated my file (v5.0 now) to include some new features:
Made the data refresh check throw an error only if any of the tickers chosen by the user are affected.
Added vanilla 60:40 and 55:45 strategies, easy way to calculate how many shares to buy by simply providing your portfolio value.
Added "a Simple Leveraged Volatility Targeted Balanced Allocation Strategy" from https://wantelbos.github.io/ I copied over the whole logic to Excel. Useful should the website ever not be available. Seems to be a very interesting strategy that I know a few people here are utilizing. For more info, check the website.
Some other minor improvements, including small layout changes.

No new tickers this time. I'm wary of adding too many (Yahoo will start acting up then and not all will refresh anymore). Beside, all the major ones are available already, and instructions to add others are in the file should you require it. Have added the VIX though, to make the wantelbos/Simple Leveraged Volatility Targeted Balanced Allocation Strategy work.

Download (1.3MB):
https://gofile.io/d/Y8612N
https://www.filehosting.org/file/detail ... 6/AAA.xlsx

@coingaroo, would it also be possible for you to create a mirror again on your hosting?

I've tried using this a couple times and it doesn't work. I'm on linux and tried both libreoffice and google sheets. Does it require MS Excel?

Also, I checked the website for the "Simple Leveraged Volatility Targeted Balanced Allocation" strategy and IDK why he calls it that. VFITX is an intermediate-term bond fund, not VIX.

Hi, sorry but it uses Yahoo Finance as an external source and those programs don't know how to work with it. MS Office for Windows works fine, no other platforms unfortunately.

Regarding the "Simple Leveraged Volatility Targeted Balanced Allocation," I used IEF instead of VFITX (IEF is the etf variant of this mutual fund, otherwise the same). It doesn't have anything to do with the VIX, the VIX is only used to calculate the volatility over the past period to determine the reallocation of 3x bonds, 1x bonds, and stocks. You can find all the info on the website btw, to me it looks like a really well thought out strategy.


https://wantelbos.github.io/


--

Something different entirely, but who else noticed a mix of UPRO/TQQQ seems to have been performing better than just UPRO or just TQQQ alone? I would have thought it would add volatility, but the diversification really seems to help out some days. UPRO might be down and TQQQ up or the other way around.

[perfectuncertainty]

Any thoughts on the dismal performance of TMF during this downturn?

Not seeing the flight to treasuries!

[rchmx1]

Any thoughts on the dismal performance of TMF during this downturn?

Not seeing the flight to treasuries!

This strategy is supposed to be long term. With a horizon of 10+ years, I guess it's to be expected that there will be anomalies in specific funds over a several months period of time.

[guyinlaw]

Any thoughts on the dismal performance of TMF during this downturn?

Not seeing the flight to treasuries!

This strategy is supposed to be long term. With a horizon of 10+ years, I guess it's to be expected that there will be anomalies in specific funds over a several months period of time.

TMF will no longer provide risk parity. Many pundits have been saying bonds no longer provide diversification to stocks. Yes bonds provide a ballast, but won't necessarily move in the opposite direction as stocks.

It seems like that Fed is trying to push the 10Y and 30Y rates higher, to avoid bubbles in stocks and housing. (Housing has been too hot due to low mortgage rates). So at least for many months TMF will drop.

See the thread below. Ray Dalio has abandoned LTT that was part of his permanent portfolio..
viewtopic.php?f=10&t=328515&p=5565261

Some are creating a bar bell with LTT+cash, others adding gold, bit coin or other diversifiers.. The era of easy UPRO/TMF is gone for now. Backtests are useless to design something for the future.

What am I doing?
~120% stocks - SPY, IWM, EEM leaps + ETFs
EDV
CASH
GLD futures
Treasury futures (for another month or so - until election clarity)

[Ciel]

I know there are some in this thread who have the majority of their portfolio in either the original strategy or some variant. I hope all of those who do truly understand the extreme risk they are taking. Maybe one exception is if you're young and your portfolio is small in absolute terms. I agree with guyinlaw's post above.

[EfficientInvestor]

Any thoughts on the dismal performance of TMF during this downturn?

Not seeing the flight to treasuries!

This strategy is supposed to be long term. With a horizon of 10+ years, I guess it's to be expected that there will be anomalies in specific funds over a several months period of time.

TMF will no longer provide risk parity. Many pundits have been saying bonds no longer provide diversification to stocks. Yes bonds provide a ballast, but won't necessarily move in the opposite direction as stocks.

It seems like that Fed is trying to push the 10Y and 30Y rates higher, to avoid bubbles in stocks and housing. (Housing has been too hot due to low mortgage rates). So at least for many months TMF will drop.

See the thread below. Ray Dalio has abandoned LTT that was part of his permanent portfolio..
viewtopic.php?f=10&t=328515&p=5565261

Some are creating a bar bell with LTT+cash, others adding gold, bit coin or other diversifiers.. The era of easy UPRO/TMF is gone for now. Backtests are useless to design something for the future.

What am I doing?
~120% stocks - SPY, IWM, EEM leaps + ETFs
EDV
CASH
GLD futures
Treasury futures (for another month or so - until election clarity)

I will echo what you are saying. If one asset, stocks, has an expected return of 5-8% (your guess is as good as mine) and a volatility of 15%, LTT has an expected return of 1.3% (current yield) and a volatility of 10%, and the risk-free rate is somewhere around 0.25%, then an efficient mix of those two assets going forward is somewhere around 2 or 3 parts stock to 1 part LTT. There is still reason to have some LTT going forward, but this new blend can no longer be considered, "risk parity" since the allocations aren't solely based on risk budgeting (allocating based on volatility and making the assumption that all assets will have similar risk-adjusted returns/Sharpe ratios going forward). As I said in another thread, maybe one should be aiming for "risk-adjusted parity" instead of "risk parity".

[drock]

Here is a detailed description of how HFEA (55/45 UPRO/TMF) portfolio has performed with the protection of a VIX options hedge. The numbers are refined from my prior post which overstated the performance. The reason for the overstatement was due to the fact that I did not derive the current monthly value of HFEA to be used as a basis for purchasing the monthly VIX option tranches that would be in effect in mid-March 2020. Nevertheless, the performance of HFEA with the protection of the VIX options hedge was substantially better than the performance of HFEA without the benefit of the insurance that was in effect since the beginning of the model.

Background Setup.
Start Date of 9/1/2011 based on stockmaster's question on page 132 of this thread.
Starting Capital: 100,000
Allocation: 55% UPRO / 45% TMF
UPRO Peak is the focus and occurred on 2/19/2020

VIX Hedge Setup.
We start with the 100,000 in starting capital
Allocate 0.3% of Net Liq each month and buy 10 delta VIX call options ~ 120 days to expiration. Purchase this on the 3rd Friday of the month.
This created 4 tranches of VIX call options that would be in effect during mid-March 2020.

The tranches were as follows:
11/15/2019 Net Liq: 648,793 to purchase VIX call options expiring on 3/18/2020. Strike price 45.00 Cost per option 0.300. Number purchased 6,400.
12/15/2019 Net Liq: 653,806 to purchase VIX call options expiring on 4/15/2020. Strike price 45.00 Cost per option 0.275. Number purchased 7,100.
01/15/2020 Net Liq: 718,380 to purchase VIX call options expiring on 5/20/2020. Strike price 40.00 Cost per option 0.200. Number purchased 10,700.
02/15/2020 Net Liq: 778,954 to purchase VIX call options expiring on 6/17/2020. Strike price 42.50. Cost per option 0.200. Number purchased 8,400.
Total Cost of the VIX Options Hedge in effect in mid-March 2020: 8,399.80

HFEA Value as of2/19/2020.
As of 2/19/2020 HFEA with the VIX Hedge applied each month since 9/1/2011 was worth 778,954.40.

This is derived using PV and daily prices from TradingView charts as follows:
PV Model with 0.3% monthly withdrawal LINK
As of 1/31/2020 HFEA with VIX Hedge applied had a Final Balance of 718,380
Price UPRO on 1/31/2020 = 69.37
Price of TMF on 1/31/2020 = 31.99
UPRO 55% allocation = 5,696 shares
TMF 45% allocation = 10,105 shares
Price of UPRO on 2/19/2020 = 80.36
Price of TMF on 2/19/2020 = 31.79
Using the # of shares for each calculated above the value for HFEA with the monthly 0.3% allocation for the VIX hedge is 778,954.40.

Performance During Mid-March 2020 for HFEA and the VIX Option Hedge
By 3/9/2020, HFEA declined by 3.57% from the 2/19 highpoint to a value of 751,182.60.
By 3/13/2020, HFEA declined by 25.64% from the 2/19 highpoint to a value of 579,204.14.
By 3/16/2020, HFEA declined by 26.86% from the 2/19 highpoint to a value of 569,763.08.

By 3/9/2020, the VIX hedge increased by 1242.53% to a value of 104,370.00.
By 3/13/2020, the VIX hedge increased by 2549.63% to a value of 214,164.00.
By 3/16/2020, the VIX hedge increased by 6912.03% to a value of 580,597.00.

By 3/9/2020, HFEA combined with the VIX hedge increased by 9.83% to a value of 855,552.60.
By 3/13/2020, HFEA combined with the VIX hedge increased by 1.85% to a value of 793,368.14.
By 3/16/2020, HFEA combined with the VIX hedge increased by 47.68% to a value of 1,150,360.08.

Point of Reference
As a point of reference if one had not utilized any hedging HFEA would have been worth 1,055,118.98 on 2/19/2020 but worth 771,762.57 on 3/16/2020.
This model and analysis does not include any application of hedging comparison for declines in HFEA in August 2015, February of 2018, and December 2018 even though the costs of the protection are modeled as being in effect at that time. The VIX hedge would have provided substantial benefit in 2008 and contained any drawdown. And again in 2010 and 2011 - I have not modeled those periods to ascertain how effective the insurance would have been.

Here is my spreadsheet with the analysis for 3/2020 LINK.

Thanks for the info. I'm surprised by how much this hedge ends up costing. It would be interesting to see if the gains in some of the smaller volatility spikes would have paid for the losses over time before we got to 2020.

Also, one dilemma I would have is, when do you sell the hedges to cash in? I guess you'd have to set up some rules about what percentage gain you'd target.

[cashmoney12399]

Here is a detailed description of how HFEA (55/45 UPRO/TMF) portfolio has performed with the protection of a VIX options hedge. The numbers are refined from my prior post which overstated the performance. The reason for the overstatement was due to the fact that I did not derive the current monthly value of HFEA to be used as a basis for purchasing the monthly VIX option tranches that would be in effect in mid-March 2020. Nevertheless, the performance of HFEA with the protection of the VIX options hedge was substantially better than the performance of HFEA without the benefit of the insurance that was in effect since the beginning of the model.

Background Setup.
Start Date of 9/1/2011 based on stockmaster's question on page 132 of this thread.
Starting Capital: 100,000
Allocation: 55% UPRO / 45% TMF
UPRO Peak is the focus and occurred on 2/19/2020

VIX Hedge Setup.
We start with the 100,000 in starting capital
Allocate 0.3% of Net Liq each month and buy 10 delta VIX call options ~ 120 days to expiration. Purchase this on the 3rd Friday of the month.
This created 4 tranches of VIX call options that would be in effect during mid-March 2020.

The tranches were as follows:
11/15/2019 Net Liq: 648,793 to purchase VIX call options expiring on 3/18/2020. Strike price 45.00 Cost per option 0.300. Number purchased 6,400.
12/15/2019 Net Liq: 653,806 to purchase VIX call options expiring on 4/15/2020. Strike price 45.00 Cost per option 0.275. Number purchased 7,100.
01/15/2020 Net Liq: 718,380 to purchase VIX call options expiring on 5/20/2020. Strike price 40.00 Cost per option 0.200. Number purchased 10,700.
02/15/2020 Net Liq: 778,954 to purchase VIX call options expiring on 6/17/2020. Strike price 42.50. Cost per option 0.200. Number purchased 8,400.
Total Cost of the VIX Options Hedge in effect in mid-March 2020: 8,399.80

HFEA Value as of2/19/2020.
As of 2/19/2020 HFEA with the VIX Hedge applied each month since 9/1/2011 was worth 778,954.40.

This is derived using PV and daily prices from TradingView charts as follows:
PV Model with 0.3% monthly withdrawal LINK
As of 1/31/2020 HFEA with VIX Hedge applied had a Final Balance of 718,380
Price UPRO on 1/31/2020 = 69.37
Price of TMF on 1/31/2020 = 31.99
UPRO 55% allocation = 5,696 shares
TMF 45% allocation = 10,105 shares
Price of UPRO on 2/19/2020 = 80.36
Price of TMF on 2/19/2020 = 31.79
Using the # of shares for each calculated above the value for HFEA with the monthly 0.3% allocation for the VIX hedge is 778,954.40.

Performance During Mid-March 2020 for HFEA and the VIX Option Hedge
By 3/9/2020, HFEA declined by 3.57% from the 2/19 highpoint to a value of 751,182.60.
By 3/13/2020, HFEA declined by 25.64% from the 2/19 highpoint to a value of 579,204.14.
By 3/16/2020, HFEA declined by 26.86% from the 2/19 highpoint to a value of 569,763.08.

By 3/9/2020, the VIX hedge increased by 1242.53% to a value of 104,370.00.
By 3/13/2020, the VIX hedge increased by 2549.63% to a value of 214,164.00.
By 3/16/2020, the VIX hedge increased by 6912.03% to a value of 580,597.00.

By 3/9/2020, HFEA combined with the VIX hedge increased by 9.83% to a value of 855,552.60.
By 3/13/2020, HFEA combined with the VIX hedge increased by 1.85% to a value of 793,368.14.
By 3/16/2020, HFEA combined with the VIX hedge increased by 47.68% to a value of 1,150,360.08.

Point of Reference
As a point of reference if one had not utilized any hedging HFEA would have been worth 1,055,118.98 on 2/19/2020 but worth 771,762.57 on 3/16/2020.
This model and analysis does not include any application of hedging comparison for declines in HFEA in August 2015, February of 2018, and December 2018 even though the costs of the protection are modeled as being in effect at that time. The VIX hedge would have provided substantial benefit in 2008 and contained any drawdown. And again in 2010 and 2011 - I have not modeled those periods to ascertain how effective the insurance would have been.

Here is my spreadsheet with the analysis for 3/2020 LINK.

When would you sell the VIX calls? Sure, looking back you can see the values of the hedge on 3/16/20, but how would you have the foresight to sell on that day? I have looked at options as a hedge but it is hard to create a hard strategy like quarterly rebalancing. Does this model assume you are holding the VIX calls to expiration?

[stockmaster]

TMF will no longer provide risk parity. Many pundits have been saying bonds no longer provide diversification to stocks. Yes bonds provide a ballast, but won't necessarily move in the opposite direction as stocks.

It seems like that Fed is trying to push the 10Y and 30Y rates higher, to avoid bubbles in stocks and housing. (Housing has been too hot due to low mortgage rates). So at least for many months TMF will drop.

See the thread below. Ray Dalio has abandoned LTT that was part of his permanent portfolio..
viewtopic.php?f=10&t=328515&p=5565261

Some are creating a bar bell with LTT+cash, others adding gold, bit coin or other diversifiers.. The era of easy UPRO/TMF is gone for now. Backtests are useless to design something for the future.

What am I doing?
~120% stocks - SPY, IWM, EEM leaps + ETFs
EDV
CASH
GLD futures
Treasury futures (for another month or so - until election clarity)

The FFR was as low as it is today (and sometimes lower) from Jan 2009 - October 2015. Yet HFEA still had better ratios than a 100% stock allocation for that same time period, and TMF itself actually doubled in value.

What's so different about today's interest rates and those from 10 years afo, aside from the cause?

[stockmaster]

Here is a detailed description of how HFEA (55/45 UPRO/TMF) portfolio has performed with the protection of a VIX options hedge. The numbers are refined from my prior post which overstated the performance. The reason for the overstatement was due to the fact that I did not derive the current monthly value of HFEA to be used as a basis for purchasing the monthly VIX option tranches that would be in effect in mid-March 2020. Nevertheless, the performance of HFEA with the protection of the VIX options hedge was substantially better than the performance of HFEA without the benefit of the insurance that was in effect since the beginning of the model.

Background Setup.
Start Date of 9/1/2011 based on stockmaster's question on page 132 of this thread.
Starting Capital: 100,000
Allocation: 55% UPRO / 45% TMF
UPRO Peak is the focus and occurred on 2/19/2020

VIX Hedge Setup.
We start with the 100,000 in starting capital
Allocate 0.3% of Net Liq each month and buy 10 delta VIX call options ~ 120 days to expiration. Purchase this on the 3rd Friday of the month.
This created 4 tranches of VIX call options that would be in effect during mid-March 2020.

The tranches were as follows:
11/15/2019 Net Liq: 648,793 to purchase VIX call options expiring on 3/18/2020. Strike price 45.00 Cost per option 0.300. Number purchased 6,400.
12/15/2019 Net Liq: 653,806 to purchase VIX call options expiring on 4/15/2020. Strike price 45.00 Cost per option 0.275. Number purchased 7,100.
01/15/2020 Net Liq: 718,380 to purchase VIX call options expiring on 5/20/2020. Strike price 40.00 Cost per option 0.200. Number purchased 10,700.
02/15/2020 Net Liq: 778,954 to purchase VIX call options expiring on 6/17/2020. Strike price 42.50. Cost per option 0.200. Number purchased 8,400.
Total Cost of the VIX Options Hedge in effect in mid-March 2020: 8,399.80

HFEA Value as of2/19/2020.
As of 2/19/2020 HFEA with the VIX Hedge applied each month since 9/1/2011 was worth 778,954.40.

This is derived using PV and daily prices from TradingView charts as follows:
PV Model with 0.3% monthly withdrawal LINK
As of 1/31/2020 HFEA with VIX Hedge applied had a Final Balance of 718,380
Price UPRO on 1/31/2020 = 69.37
Price of TMF on 1/31/2020 = 31.99
UPRO 55% allocation = 5,696 shares
TMF 45% allocation = 10,105 shares
Price of UPRO on 2/19/2020 = 80.36
Price of TMF on 2/19/2020 = 31.79
Using the # of shares for each calculated above the value for HFEA with the monthly 0.3% allocation for the VIX hedge is 778,954.40.

Performance During Mid-March 2020 for HFEA and the VIX Option Hedge
By 3/9/2020, HFEA declined by 3.57% from the 2/19 highpoint to a value of 751,182.60.
By 3/13/2020, HFEA declined by 25.64% from the 2/19 highpoint to a value of 579,204.14.
By 3/16/2020, HFEA declined by 26.86% from the 2/19 highpoint to a value of 569,763.08.

By 3/9/2020, the VIX hedge increased by 1242.53% to a value of 104,370.00.
By 3/13/2020, the VIX hedge increased by 2549.63% to a value of 214,164.00.
By 3/16/2020, the VIX hedge increased by 6912.03% to a value of 580,597.00.

By 3/9/2020, HFEA combined with the VIX hedge increased by 9.83% to a value of 855,552.60.
By 3/13/2020, HFEA combined with the VIX hedge increased by 1.85% to a value of 793,368.14.
By 3/16/2020, HFEA combined with the VIX hedge increased by 47.68% to a value of 1,150,360.08.

Point of Reference
As a point of reference if one had not utilized any hedging HFEA would have been worth 1,055,118.98 on 2/19/2020 but worth 771,762.57 on 3/16/2020.
This model and analysis does not include any application of hedging comparison for declines in HFEA in August 2015, February of 2018, and December 2018 even though the costs of the protection are modeled as being in effect at that time. The VIX hedge would have provided substantial benefit in 2008 and contained any drawdown. And again in 2010 and 2011 - I have not modeled those periods to ascertain how effective the insurance would have been.

Here is my spreadsheet with the analysis for 3/2020 LINK.

Fantastic! I'll look over that in some more detail soon.

Have you found any way of automatically buying options on a schedule? And which VIX ETF do you buy your calls on? Short-term or mid-term?

[EfficientInvestor]

TMF will no longer provide risk parity. Many pundits have been saying bonds no longer provide diversification to stocks. Yes bonds provide a ballast, but won't necessarily move in the opposite direction as stocks.

It seems like that Fed is trying to push the 10Y and 30Y rates higher, to avoid bubbles in stocks and housing. (Housing has been too hot due to low mortgage rates). So at least for many months TMF will drop.

See the thread below. Ray Dalio has abandoned LTT that was part of his permanent portfolio..
viewtopic.php?f=10&t=328515&p=5565261

Some are creating a bar bell with LTT+cash, others adding gold, bit coin or other diversifiers.. The era of easy UPRO/TMF is gone for now. Backtests are useless to design something for the future.

What am I doing?
~120% stocks - SPY, IWM, EEM leaps + ETFs
EDV
CASH
GLD futures
Treasury futures (for another month or so - until election clarity)

The FFR was as low as it is today (and sometimes lower) from Jan 2009 - October 2015. Yet HFEA still had better ratios than a 100% stock allocation for that same time period, and TMF itself actually doubled in value.

What's so different about today's interest rates and those from 10 years afo, aside from the cause?

From 1/2009 - 10/2015, even though FFR was held around 0, 30 year treasury rates dropped from 4% to 3%. That drop is mostly what drove the returns on TMF during that time. TMF also benefited from the spread between the yield and the borrowing rate (near zero) during that time. The entire yield curve has compressed since then to where the 30 year rate is currently 1.6% and the 20 year is just shy of 1.4%. Rates can’t go much lower from here unless the fed indicates they are willing to go negative with the FFR. In addition, since the spread between yield and borrow rate is much slimmer you can’t earn as much from the spread.

[kjm]

I know there are some in this thread who have the majority of their portfolio in either the original strategy or some variant. I hope all of those who do truly understand the extreme risk they are taking. Maybe one exception is if you're young and your portfolio is small in absolute terms. I agree with guyinlaw's post above.

I think there's a middle ground between the three-fund portfolio (for instance) and HFEA. I'm doing the following in my self-directed 401(k)...

SSO - 20%
QLD - 20%
TLT - 40%
GLD - 20%

The leverage factor comes out to 1.4. That might qualify as "extremely risky", but risky relative to what? A lot of young investors are advised to hold 100% stocks. PV shows lower standard deviation and max drawdowns for the above allocation compared to 100% stocks. I guess there's a chance SSO or QLD could go to zero. In that case, I could still come out ahead of a 100% stock portfolio.

I'm curious, does anyone else have a significant portion (over half) of their long term savings in leveraged ETFs? How are you allocated?

[stockmaster]

From 1/2009 - 10/2015, even though FFR was held around 0, 30 year treasury rates dropped from 4% to 3%. That drop is mostly what drove the returns on TMF during that time. TMF also benefited from the spread between the yield and the borrowing rate (near zero) during that time. The entire yield curve has compressed since then to where the 30 year rate is currently 1.6% and the 20 year is just shy of 1.4%. Rates can’t go much lower from here unless the fed indicates they are willing to go negative with the FFR. In addition, since the spread between yield and borrow rate is much slimmer you can’t earn as much from the spread.

I see. You're right, 30-year treasury rates are at an all-time low right now, although the rates have also been stable since February.

From February to today the value of TMF has also been high and stable. Sounds like it's due for a correction. But the issue isn't TMF's profitability, it's TMF's stock market correlation, and its stock market correlation for that time period was -55% according to PV.

In the link guyinlaw provided, Ray Dalio makes a good argument for the poor performance of TMF going forward, but I still fail to see how any of this translates into TMF suddenly behaving like equity...

[perfectuncertainty]

Fantastic! I'll look over that in some more detail soon.

Have you found any way of automatically buying options on a schedule? And which VIX ETF do you buy your calls on? Short-term or mid-term?

I'll answer the second question first. Don't buy calls on the ETF. Buy them on VIX (the index).

I don't know how much you or any of the other readers know about options. If you do my explanation below will be incredibly rote and simplistic. If not it might feel complicated or intimidating. Options are their own animal and have their own language (including some Greek ). I apologize to both groups in advance since I realize I won't please either

Options expire every month. Our hedge consists of 4 tranches of VIX call options that have been purchased in the 4 preceding months. We buy a new tranche every month. To calculate the cost of the tranche, take 0.3% of the net liq, and allocate that amount to the hedge for the tranche we are purchasing. Let's call this our "current insurance premium".

On the 3rd Wednesday of the month, which is 2 days prior to options expiration for the current month (3rd Friday), we want to buy 10 delta call options that will expire around 120 days from the current date (it won't be exactly 120 dte mostof the time).

We open our trading platform and look up the monthly option chain for VIX and locate the 10 delta call option that has an expiration date in ~ 120 days' time. Divide our "current insurance premium" by the price of the 10 delta call option. Divide that number by 100 (since options are sold in contracts consisting of 100 options) and that is the quantity of 10 delta VIX call options we buy for the month. Rinse and repeat.

I don't use an automated method or program to do this - it's kinda fun to do it manually and think and learn something new every time.

Lastly, this is not a cheap hedge. It's not meant to be. We are investing/trading in leveraged ETFs and the reason this is the longest thread on BH is that the leveraged ETFs offer much higher returns than the market index. We expect high returns otherwise don't take the risk. As we have also seen when crashes occur this leveraged portfolio takes massive intra-month (not reflected on PV) drawdowns. I want good insurance in a situation like that. Good enough that during the time of the crash I can expect the insurance to pay up and save my portfolio. We look at HFEA and see 30% annual returns. The experienced among us shy away or allocate a tiny fraction to a strategy like this - they are the old bold traders! I'm suggesting that we can be bolder with HFEA's strategy (TMF is another issue and sleep at night if we have an extra level of insurance. In March we crashed a Bogle Header Camry and the insurance paid us out for a Mercedes Benz.

[chillpenguin]

I'm sure this has been asked before but I had trouble finding it.

How do I import the data going back to 1955 into portfolio visualizer?

In this post: viewtopic.php?p=4426328#p4426328, HEDGEFUNDIE shows a graph of UPROSIM, and a few posts later TMFSIM going all the way back to 1955.

I was able to get the 1986 UPRO/TMF sim data imported into PV, but I'm having trouble with the 1955 data. The data apparently came from siamond's spreadsheet, but I only found yearly (not daily) data in the spreadsheet. PV doesn't have an import option for yearly returns, but rather it only supports daily, monthly, and quarterly.

Let me know if I'm missing something, thanks!

[drock]

Fantastic! I'll look over that in some more detail soon.

Have you found any way of automatically buying options on a schedule? And which VIX ETF do you buy your calls on? Short-term or mid-term?

I'll answer the second question first. Don't buy calls on the ETF. Buy them on VIX (the index).

I don't know how much you or any of the other readers know about options. If you do my explanation below will be incredibly rote and simplistic. If not it might feel complicated or intimidating. Options are their own animal and have their own language (including some Greek ). I apologize to both groups in advance since I realize I won't please either

Options expire every month. Our hedge consists of 4 tranches of VIX call options that have been purchased in the 4 preceding months. We buy a new tranche every month. To calculate the cost of the tranche, take 0.3% of the net liq, and allocate that amount to the hedge for the tranche we are purchasing. Let's call this our "current insurance premium".

On the 3rd Wednesday of the month, which is 2 days prior to options expiration for the current month (3rd Friday), we want to buy 10 delta call options that will expire around 120 days from the current date (it won't be exactly 120 dte mostof the time).

We open our trading platform and look up the monthly option chain for VIX and locate the 10 delta call option that has an expiration date in ~ 120 days' time. Divide our "current insurance premium" by the price of the 10 delta call option. Divide that number by 100 (since options are sold in contracts consisting of 100 options) and that is the quantity of 10 delta VIX call options we buy for the month. Rinse and repeat.

I don't use an automated method or program to do this - it's kinda fun to do it manually and think and learn something new every time.

Lastly, this is not a cheap hedge. It's not meant to be. We are investing/trading in leveraged ETFs and the reason this is the longest thread on BH is that the leveraged ETFs offer much higher returns than the market index. We expect high returns otherwise don't take the risk. As we have also seen when crashes occur this leveraged portfolio takes massive intra-month (not reflected on PV) drawdowns. I want good insurance in a situation like that. Good enough that during the time of the crash I can expect the insurance to pay up and save my portfolio. We look at HFEA and see 30% annual returns. The experienced among us shy away or allocate a tiny fraction to a strategy like this - they are the old bold traders! I'm suggesting that we can be bolder with HFEA's strategy (TMF is another issue and sleep at night if we have an extra level of insurance. In March we crashed a Bogle Header Camry and the insurance paid us out for a Mercedes Benz.

Have you already been running this strategy? I'm wondering if it is hard to get fills for buying/selling those options.

[Perfect Uncertainty]

Fills are super easy. Lots of volume.

[stormcrow]

Fills are super easy. Lots of volume.

So you are just letting them expire then - profiting if ITM at expiry? (I.e., not cashing any out ahead of time.)

[perfectuncertainty]

Fills are super easy. Lots of volume.

So you are just letting them expire then - profiting if ITM at expiry? (I.e., not cashing any out ahead of time.)

Yes since it’s a hedge I'm not trying to manage them for a profit. Most of the time they expire worthless, but if they happen to be ITM there is an automatic account credit adjustment since there is no assignment like options on equities. Feels horrible but when you get your brain around it as good insurance versus an options play it feels a bit better.

[PicassoSparks]

Why all this financial engineering around the low treasury rates but not around the CAPE being at 30?

We should have lower expected returns for UPRO and TMF, no?

[stockmaster]

Why all this financial engineering around the low treasury rates but not around the CAPE being at 30?

We should have lower expected returns for UPRO and TMF, no?

This is easily fixed by choosing a different equity ETF. All bonds are affected by the FFR but not all stocks have the same PE ratio.

[kjm]

Why all this financial engineering around the low treasury rates but not around the CAPE being at 30?

We should have lower expected returns for UPRO and TMF, no?

Gold is looking downright cheap relative to stocks and treasuries...

https://thefelderreport.com/2020/10/14/ ... expensive/

[Forester]

Why all this financial engineering around the low treasury rates but not around the CAPE being at 30?

We should have lower expected returns for UPRO and TMF, no?

Gold is looking downright cheap relative to stocks and treasuries...

https://thefelderreport.com/2020/10/14/ ... expensive/

No gold is not cheap. It is fair to slightly rich if you calculate the inflation adjusted bubble highs of 1980 & 2011. Treasuries on the other hand are very expensive. If the 1970s repeat, the strategy in this thread will be moreorless wiped out because the TMF leg will be leveraging losses. Gold & commodities generally will benefit when investors sour on bonds.

[gokuisthebest]

in this reply from Hedgefundie, viewtopic.php?p=4692519#p4692519 he says:
"The inclusion of long Treasuries has always primarily been for stock crash insurance. The biggest risk of that insurance is a long term rise in long rates, but I have explained here and elsewhere why I do not consider this risk to be material, in the US, at this juncture."

Does anyone know where he talked about why he doesnt consider this risky?
Theres another reply viewtopic.php?f=10&t=272007&start=250#p4371904 but he skis the part "Rising interest rates".

From 1/2009 - 10/2015, even though FFR was held around 0, 30 year treasury rates dropped from 4% to 3%. That drop is mostly what drove the returns on TMF during that time. TMF also benefited from the spread between the yield and the borrowing rate (near zero) during that time. The entire yield curve has compressed since then to where the 30 year rate is currently 1.6% and the 20 year is just shy of 1.4%. Rates can’t go much lower from here unless the fed indicates they are willing to go negative with the FFR. In addition, since the spread between yield and borrow rate is much slimmer you can’t earn as much from the spread.

isnt Hedgefundie fine with -ve returns from TMF as long as it helps during crashes and UPRO providing similar or slightly lower returns. But im not sure why he thinks this scenario wouldnt occur, is there any discussion about this part:
"What are the risks of your strategy?
The main risk is that the S&P 500 and long Treasuries crash together in the same short period of time. In the past 30 years this has not happened, and I can't think of a real-world scenario in which this would happen. I acknowledge this risk and move forward having accepted it."

[stockmaster]

Hi, sorry but it uses Yahoo Finance as an external source and those programs don't know how to work with it. MS Office for Windows works fine, no other platforms unfortunately.

Regarding the "Simple Leveraged Volatility Targeted Balanced Allocation," I used IEF instead of VFITX (IEF is the etf variant of this mutual fund, otherwise the same). It doesn't have anything to do with the VIX, the VIX is only used to calculate the volatility over the past period to determine the reallocation of 3x bonds, 1x bonds, and stocks. You can find all the info on the website btw, to me it looks like a really well thought out strategy.


https://wantelbos.github.io/

Yeah I saw the whole website, but it never explains why you should buy VFITX if VIX is high. VFITX has pretty terrible performance, even back in March. Why not allocate to more TMF instead? Or a VIX ETF?

[stockmaster]

No gold is not cheap. It is fair to slightly rich if you calculate the inflation adjusted bubble highs of 1980 & 2011. Treasuries on the other hand are very expensive. If the 1970s repeat, the strategy in this thread will be moreorless wiped out because the TMF leg will be leveraging losses. Gold & commodities generally will benefit when investors sour on bonds.

Doesn't gold correlate far too much with the stock market to be a useful hedge?

[000]

I predict pain and regret for the HFEA over the next few years.

UPRO misses so many US and World stocks.

TMF seems to be losing its negative correlation, as I predicted a few months back in this thread.

The leverage compounds the pain of rising rates as you're holding long term debt but borrowing with short term debt.

[cos]

No gold is not cheap. It is fair to slightly rich if you calculate the inflation adjusted bubble highs of 1980 & 2011. Treasuries on the other hand are very expensive. If the 1970s repeat, the strategy in this thread will be moreorless wiped out because the TMF leg will be leveraging losses. Gold & commodities generally will benefit when investors sour on bonds.

Doesn't gold correlate far too much with the stock market to be a useful hedge?

Huh? The correlation between stocks and gold is practically zero.

Check out the decrease in standard deviation and max drawdown offered by a 25% allocation to gold.

[Forester]

Bonds are now becoming shaky on equity sell offs because the lower stocks go the more fiscal stimulus is implied and therefore more future inflation is priced in.

[kjm]

Bonds are now becoming shaky on equity sell offs because the lower stocks go the more fiscal stimulus is implied and therefore more future inflation is priced in.

That’s a fair point. However, I suspect any big move on the fiscal side will be matched by more bond buying on the monetary side. Hard to say whether QE or inflation wins out in the end. I’m hedging by moving part of my treasury allocation to gold.

[Mother_McCrankel]

Given the consensus here recently re the short and medium term likely performance of TMF / UBT, what should we considering moving towards for risk parity with leveraged indicies?

Personally I'm going the QLD + UBT route and currently 5% underwater since beginning 2 months ago. Seeing this week's market volatility UBT did very little to cushion against a weakening QLD.

[drock]

Fills are super easy. Lots of volume.

So you are just letting them expire then - profiting if ITM at expiry? (I.e., not cashing any out ahead of time.)

Yes since it’s a hedge I'm not trying to manage them for a profit. Most of the time they expire worthless, but if they happen to be ITM there is an automatic account credit adjustment since there is no assignment like options on equities. Feels horrible but when you get your brain around it as good insurance versus an options play it feels a bit better.

So if there is a vol spike you don't plan to take advantage and sell at some point while vol is high to lock in the gains before vol returns closer to the mean?

[kjm]

Given the consensus here recently re the short and medium term likely performance of TMF / UBT, what should we considering moving towards for risk parity with leveraged indicies?

Personally I'm going the QLD + UBT route and currently 5% underwater since beginning 2 months ago. Seeing this week's market volatility UBT did very little to cushion against a weakening QLD.

UGL is the 2x gold ETF. Gold held up very well this past week compared to stocks. Historically, adding gold to stocks and bonds improves Sharpe and max drawdowns.

[perfectuncertainty]

Fills are super easy. Lots of volume.

So you are just letting them expire then - profiting if ITM at expiry? (I.e., not cashing any out ahead of time.)

Yes since it’s a hedge I'm not trying to manage them for a profit. Most of the time they expire worthless, but if they happen to be ITM there is an automatic account credit adjustment since there is no assignment like options on equities. Feels horrible but when you get your brain around it as good insurance versus an options play it feels a bit better.

So if there is a vol spike you don't plan to take advantage and sell at some point while vol is high to lock in the gains before vol returns closer to the mean?

It's a judgment call. Depends on the size of the spike. If VIX is spiking up the S&P is headed the other way. Need to consider the timing (right at expiration), the amount of the payout, whether I'm leaving the equities in play without insurance etc. This is a black swan hedge and so it's meant to protect against low probability, highly impactful events. I've been quite focused on finding ways to protect my principal in a world where we have increasing levels of unpredictability. I'm in my early 50s and I'm mindful of preserving principal AND finding a way to enter retirement where I can sleep soundly without being concerned about a period of volatility or long drawdown right when I need to count on what I have accumulated. Searching for agnostic growth with protection!

[stockmaster]

Given the consensus here recently re the short and medium term likely performance of TMF / UBT, what should we considering moving towards for risk parity with leveraged indicies?

Personally I'm going the QLD + UBT route and currently 5% underwater since beginning 2 months ago. Seeing this week's market volatility UBT did very little to cushion against a weakening QLD.

UGL is the 2x gold ETF. Gold held up very well this past week compared to stocks. Historically, adding gold to stocks and bonds improves Sharpe and max drawdowns.

Would you consider something like HFEA with 55% 2x Equity and 45% UGL?

And why UGL instead of DGP, which has a lower expense ratio?

[stockmaster]

Huh? The correlation between stocks and gold is practically zero.

Check out the decrease in standard deviation and max drawdown offered by a 25% allocation to gold.

Then why did gold crash back in March, while TMF peaked? If the big issue is TMF having high correlation to the stock market now, then by the same standard even leveraged gold like DGP and UGL is much worse than TMF.

[stockmaster]

Also, could someone explain why TMF is supposed to behave like equity now? Nobody outside of this forum seems to have that opinion.

[Uncorrelated]

Huh? The correlation between stocks and gold is practically zero.

Check out the decrease in standard deviation and max drawdown offered by a 25% allocation to gold.

Then why did gold crash back in March, while TMF peaked? If the big issue is TMF having high correlation to the stock market now, then by the same standard even leveraged gold like DGP and UGL is much worse than TMF.

A correlation of zero means that there is a 50% chance they will move in unison. If you want to evaluate the correlation of two different funds, then you'll need to review many different events, not just one.

There never was solid evidence that TMF was negatively correlated with the stock market, there definitely isn't any evidence that the situation changed recently. Evaluating correlations is extremely difficult, even over a time period of 20 years or more you'll often end up with estimates of the correlation that are complete garbage.

[000]

Huh? The correlation between stocks and gold is practically zero.

Check out the decrease in standard deviation and max drawdown offered by a 25% allocation to gold.

Then why did gold crash back in March, while TMF peaked? If the big issue is TMF having high correlation to the stock market now, then by the same standard even leveraged gold like DGP and UGL is much worse than TMF.

As always, it depends on exactly when one enters and exits one's positions. TMF also "crashed" in March. If you bought TMF in Februrary, you'd have been underwater on its worst day in March:



Of course, if you managed to rebalance multiple times in March, it might have worked out well...

[hell0men]

Hi, sorry but it uses Yahoo Finance as an external source and those programs don't know how to work with it. MS Office for Windows works fine, no other platforms unfortunately.

Regarding the "Simple Leveraged Volatility Targeted Balanced Allocation," I used IEF instead of VFITX (IEF is the etf variant of this mutual fund, otherwise the same). It doesn't have anything to do with the VIX, the VIX is only used to calculate the volatility over the past period to determine the reallocation of 3x bonds, 1x bonds, and stocks. You can find all the info on the website btw, to me it looks like a really well thought out strategy.


https://wantelbos.github.io/


--

Something different entirely, but who else noticed a mix of UPRO/TQQQ seems to have been performing better than just UPRO or just TQQQ alone? I would have thought it would add volatility, but the diversification really seems to help out some days. UPRO might be down and TQQQ up or the other way around.

I would like to know a couple of things about the strategy https://wantelbos.github.io/.

How often is rebalancing performed?
What were the transaction costs taken into account for each operation?
Is it possible to compare a strategy with rebalancing on a monthly basis with a constant ratio of instruments. For example, 50/50?

On the backtest schedule, it looks like when the market falls, we reduce the share price and will lag behind the market to recover. That is, we stand up against the market. If we use a common rebalancing strategy, the opposite happens. We buy up fallen stocks instead of selling them. I want to compare these two approaches.

Thank you!