HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by cflannagan »

tomphilly wrote: Thu Nov 11, 2021 10:14 am If you want to reduce TMF exposure but still want to fly by the seat of your pants with epic CAGR's and eye bleeding drawdowns, HFEAWAAH™ (HedgeFundie's Excellent Adventure With An Alternate Hedge) is for you - PV. I've been running it since Jan.
I see VIXY is VIX short-term futures. What is the role of VIXY here? Does it go up when VIX is volatile, or something else?

Edit: yikes, I looked at VIXY's entire history. I replaced VIXY with CASHX (just holding cash for the 5% of that portfolio you mentioned), got better returns on the portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

I would not judge VIXY alone - it looks terrible. But as part of the mix, as I understand it, VIXY mostly deleverages the higher UPRO percent, since it usually always negatively correlates. If you switch it for 5% CASHX, you will experience massive drawdowns - you would have experienced a 77% drawdown during the 2008 crash. Though I can't backtest with VIXY to see how it would have performed as a HFEA component during 2008, my assumption (my hope) is its drawdown would be comparable to HFEA 60/40.

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

Post by comeinvest »

adamhg wrote: Thu Nov 11, 2021 2:13 pm
skierincolorado wrote: Thu Nov 11, 2021 11:08 am
darkcam wrote: Thu Nov 11, 2021 11:02 am Is the small amount of net assets in TYD at all concerning when comparing to TMF?
Yes one poster reported lack of liquidity trading it. I think others have traded it though. And Another poster did not report any difficulties trading TYA.
I would avoid TYD. When I traded it earlier today, bid was at 51.75, ask was at 51.82. Placed a market order for just shy of 1000 shares and got fills between 51.75 to 51.71 (51.729 avg).

That really shouldn't have happened with the futures underlying holdings being quite liquid, but I guess the trade wasn't that large either for the AP to bother. There is definitely a liquidity issue.

ETA: I see now that the leverage comes from swaps so that is probably quite a bit less liquid. TYA _should_ be better by using futures instead
Why did you place a market order, when you know that the volume (and more importantly, the bis/ask sizes) are low? How about placing a limit order, and/or a series of smaller market orders?

I don't know if you have market data, but many brokers let you see the bid size and ask size. If you know that the bid size is x, and you place a market order of size y (y > x), how can you possibly expect the entire sell order to be filled at the best bid? Are you saying that the AP can fill your order through an alternate marketplace other than through any of the exchanges?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

comeinvest wrote: Thu Nov 11, 2021 8:52 pm
adamhg wrote: Thu Nov 11, 2021 2:13 pm
skierincolorado wrote: Thu Nov 11, 2021 11:08 am
darkcam wrote: Thu Nov 11, 2021 11:02 am Is the small amount of net assets in TYD at all concerning when comparing to TMF?
Yes one poster reported lack of liquidity trading it. I think others have traded it though. And Another poster did not report any difficulties trading TYA.
I would avoid TYD. When I traded it earlier today, bid was at 51.75, ask was at 51.82. Placed a market order for just shy of 1000 shares and got fills between 51.75 to 51.71 (51.729 avg).

That really shouldn't have happened with the futures underlying holdings being quite liquid, but I guess the trade wasn't that large either for the AP to bother. There is definitely a liquidity issue.

ETA: I see now that the leverage comes from swaps so that is probably quite a bit less liquid. TYA _should_ be better by using futures instead
Why did you place a market order, when you know that the volume (and more importantly, the bis/ask sizes) are low? How about placing a limit order, and/or a series of smaller market orders?

I don't know if you have market data, but many brokers let you see the bid size and ask size. If you know that the bid size is x, and you place a market order of size y (y > x), how can you possibly expect the entire sell order to be filled at the best bid? Are you saying that the AP can fill your order through an alternate marketplace other than through any of the exchanges?
Usually etfs don't work the same as stocks in that way (see my ntsx post where I accounted for 20% of the daily volume in one market order).

Market orders are usually fine when the etf holdings are liquid even if the etf itself is not. I often even get price improvements this way with pfof

I was under the mistaken impression TYD was using futures and should have checked, but I guess swaps aren't as liquid for them. No big deal. Lesson learned and only cost a few dollars
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

adamhg wrote: Thu Nov 11, 2021 9:06 pm
comeinvest wrote: Thu Nov 11, 2021 8:52 pm
adamhg wrote: Thu Nov 11, 2021 2:13 pm
skierincolorado wrote: Thu Nov 11, 2021 11:08 am
darkcam wrote: Thu Nov 11, 2021 11:02 am Is the small amount of net assets in TYD at all concerning when comparing to TMF?
Yes one poster reported lack of liquidity trading it. I think others have traded it though. And Another poster did not report any difficulties trading TYA.
I would avoid TYD. When I traded it earlier today, bid was at 51.75, ask was at 51.82. Placed a market order for just shy of 1000 shares and got fills between 51.75 to 51.71 (51.729 avg).

That really shouldn't have happened with the futures underlying holdings being quite liquid, but I guess the trade wasn't that large either for the AP to bother. There is definitely a liquidity issue.

ETA: I see now that the leverage comes from swaps so that is probably quite a bit less liquid. TYA _should_ be better by using futures instead
Why did you place a market order, when you know that the volume (and more importantly, the bis/ask sizes) are low? How about placing a limit order, and/or a series of smaller market orders?

I don't know if you have market data, but many brokers let you see the bid size and ask size. If you know that the bid size is x, and you place a market order of size y (y > x), how can you possibly expect the entire sell order to be filled at the best bid? Are you saying that the AP can fill your order through an alternate marketplace other than through any of the exchanges?
Usually etfs don't work the same as stocks in that way (see my ntsx post where I accounted for 20% of the daily volume in one market order).

Market orders are usually fine when the etf holdings are liquid even if the etf itself is not. I often even get price improvements this way with pfof

I was under the mistaken impression TYD was using futures and should have checked, but I guess swaps aren't as liquid for them. No big deal. Lesson learned and only cost a few dollars
I read the post that you linked, but it is not conclusive to me, and no rationale or explanation is given. First, it was suggested that smaller orders fill worse than the ask (for buy orders). I don't see how that is possible if the order size is less than the ask size; I don't even think it's legal to fill and order worse than the NBBO. Second, it was suggested to use market orders for very large limit orders. Regardless of your theory on the liquidity of the underlyings, I think this is dangerous. Can you please elaborate, or provide a link with a rationale for this methodology? Single anecdotes don't mean much. Your relatively large order could have been filled on a combination of exchanges, or on dark pools, or internalized by your broker.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

comeinvest wrote: Fri Nov 12, 2021 3:16 pm
adamhg wrote: Thu Nov 11, 2021 9:06 pm
comeinvest wrote: Thu Nov 11, 2021 8:52 pm
adamhg wrote: Thu Nov 11, 2021 2:13 pm
skierincolorado wrote: Thu Nov 11, 2021 11:08 am

Yes one poster reported lack of liquidity trading it. I think others have traded it though. And Another poster did not report any difficulties trading TYA.
I would avoid TYD. When I traded it earlier today, bid was at 51.75, ask was at 51.82. Placed a market order for just shy of 1000 shares and got fills between 51.75 to 51.71 (51.729 avg).

That really shouldn't have happened with the futures underlying holdings being quite liquid, but I guess the trade wasn't that large either for the AP to bother. There is definitely a liquidity issue.

ETA: I see now that the leverage comes from swaps so that is probably quite a bit less liquid. TYA _should_ be better by using futures instead
Why did you place a market order, when you know that the volume (and more importantly, the bis/ask sizes) are low? How about placing a limit order, and/or a series of smaller market orders?

I don't know if you have market data, but many brokers let you see the bid size and ask size. If you know that the bid size is x, and you place a market order of size y (y > x), how can you possibly expect the entire sell order to be filled at the best bid? Are you saying that the AP can fill your order through an alternate marketplace other than through any of the exchanges?
Usually etfs don't work the same as stocks in that way (see my ntsx post where I accounted for 20% of the daily volume in one market order).

Market orders are usually fine when the etf holdings are liquid even if the etf itself is not. I often even get price improvements this way with pfof

I was under the mistaken impression TYD was using futures and should have checked, but I guess swaps aren't as liquid for them. No big deal. Lesson learned and only cost a few dollars
I read the post that you linked, but it is not conclusive to me, and no rationale or explanation is given. First, it was suggested that smaller orders fill worse than the ask (for buy orders). I don't see how that is possible if the order size is less than the ask size; I don't even think it's legal to fill and order worse than the NBBO. Second, it was suggested to use market orders for very large limit orders. Regardless of your theory on the liquidity of the underlyings, I think this is dangerous. Can you please elaborate, or provide a link with a rationale for this methodology? Single anecdotes don't mean much. Your relatively large order could have been filled on a combination of exchanges, or on dark pools, or internalized by your broker.
https://www.ssga.com/us/en/intermediary ... d-redeemed
When demand increases, more ETF shares can be created using this process. In effect, this allows the liquidity of an ETF’s underlying securities to enhance the liquidity of the ETF itself.
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

adamhg wrote: Fri Nov 12, 2021 3:27 pm
comeinvest wrote: Fri Nov 12, 2021 3:16 pm
adamhg wrote: Thu Nov 11, 2021 9:06 pm
comeinvest wrote: Thu Nov 11, 2021 8:52 pm Why did you place a market order, when you know that the volume (and more importantly, the bis/ask sizes) are low? How about placing a limit order, and/or a series of smaller market orders?

I don't know if you have market data, but many brokers let you see the bid size and ask size. If you know that the bid size is x, and you place a market order of size y (y > x), how can you possibly expect the entire sell order to be filled at the best bid? Are you saying that the AP can fill your order through an alternate marketplace other than through any of the exchanges?
Usually etfs don't work the same as stocks in that way (see my ntsx post where I accounted for 20% of the daily volume in one market order).

Market orders are usually fine when the etf holdings are liquid even if the etf itself is not. I often even get price improvements this way with pfof

I was under the mistaken impression TYD was using futures and should have checked, but I guess swaps aren't as liquid for them. No big deal. Lesson learned and only cost a few dollars
I read the post that you linked, but it is not conclusive to me, and no rationale or explanation is given. First, it was suggested that smaller orders fill worse than the ask (for buy orders). I don't see how that is possible if the order size is less than the ask size; I don't even think it's legal to fill and order worse than the NBBO. Second, it was suggested to use market orders for very large limit orders. Regardless of your theory on the liquidity of the underlyings, I think this is dangerous. Can you please elaborate, or provide a link with a rationale for this methodology? Single anecdotes don't mean much. Your relatively large order could have been filled on a combination of exchanges, or on dark pools, or internalized by your broker.
https://www.ssga.com/us/en/intermediary ... d-redeemed
When demand increases, more ETF shares can be created using this process. In effect, this allows the liquidity of an ETF’s underlying securities to enhance the liquidity of the ETF itself.
"The ETF creation and redemption process takes place in the primary market between the ETF sponsor and authorized participants (APs)."
"Authorized participants create ETF shares in large increments—known as creation units—by assembling the underlying securities of the fund in their appropriate weightings to reach creation unit size, which is typically 50,000 ETF shares. The AP then delivers those securities to the ETF sponsor (like us at SPDR ETFs)..."
"In return, the ETF sponsor bundles the securities into the ETF wrapper, and delivers the ETF shares to the AP. These newly created ETF shares are then introduced to the secondary market, where they are traded between buyers and sellers through the exchange."

Seems pretty clear that the creation and redemption process is between the ETF sponsor and the AP, and completely separate from the trading on exchanges.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
Exactly not. I strongly doubt. How would that work? The retail trade is controlled by the order book of the exchange and the matching algo, and the fill of market orders happens based on resting limit orders. Except when the broker routes to a dark pool or ECN, but same principle in that case. Happy to stand corrected.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
This is the kind of detail I was wondering about, in relation to some of the lower-volume LETFs that we have discussed throughout these threads. One of my worries with choosing a maximum allocation to something like TYD was the total AUM and average daily volume.

We are told that Authorized Participants can create and redeem units of the ETF, using purchases or sales of the underlying assets within the ETF. I just found some basic explanations on the Web but I don't recall ever finding details on points like:
1- How can Direxion or Proshares actually create units during a trading day if a large chunk of the underlying assets are not simple stocks but custom equity/ bond swaps? Do they mark down any additional exposure that was added and deal with the investment banks to adjust the swap value, at end-of-day?

2a- How is the actual practice of creation or redemption applied. Let's say that I buy 100 shares of TYD, but there is insufficient counter-parties to complete the transaction. How long do the APs wait before filling my order? Does the order have to be an explicit Market Order? Does a Limit Order at or beyond the latest transaction price get accounted for?

2b- Likewise, and what worries me more, what happens when I want to sell 100 shares at a reasonable price (close to last transaction) and there are no buyers? Would an AP swoop in to buy them? If so, at what point and in what way (some bots like you mentioned)?

All these worries about liquidity we've been discussing might be a moot point, if there is a solid process in place to create liquidity. Even if there was price inefficiency due to this, I imagine it being worth it to dive in nonetheless, instead of staying on the sidelines due to the fear of being stuck as a giant whale that owns a large chunk of the ETF units and being unable to transact.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

comeinvest wrote: Fri Nov 12, 2021 4:56 pm
Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
Exactly not. I strongly doubt. How would that work? The retail trade is controlled by the order book of the exchange and the matching algo, and the fill of market orders happens based on resting limit orders. Except when the broker routes to a dark pool or ECN, but same principle in that case. Happy to stand corrected.
Think about it this way. If the underlying were liquid, this is an easy arbitrage for anybody not just the ap. Buy the holdings, sell the etf, profit the difference.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

adamhg wrote: Fri Nov 12, 2021 6:28 pm
comeinvest wrote: Fri Nov 12, 2021 4:56 pm
Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
Exactly not. I strongly doubt. How would that work? The retail trade is controlled by the order book of the exchange and the matching algo, and the fill of market orders happens based on resting limit orders. Except when the broker routes to a dark pool or ECN, but same principle in that case. Happy to stand corrected.
Think about it this way. If the underlying were liquid, this is an easy arbitrage for anybody not just the ap. Buy the holdings, sell the etf, profit the difference.
Understood, maybe that leads to tighter spreads or bigger bid/ask top of the book sizes i.e. less spread i.e. trading cost for you; but again, the paragraph that I cited in my recent post is pretty clear that the creation and redemption process is between the AP and the sponsor. And again, how would that process that you envision work in real time. The order book is the order book, and the order matching algo does its thing from the order book. Please cite any reference that says otherwise.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

comeinvest wrote: Fri Nov 12, 2021 6:35 pm
adamhg wrote: Fri Nov 12, 2021 6:28 pm
comeinvest wrote: Fri Nov 12, 2021 4:56 pm
Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
Exactly not. I strongly doubt. How would that work? The retail trade is controlled by the order book of the exchange and the matching algo, and the fill of market orders happens based on resting limit orders. Except when the broker routes to a dark pool or ECN, but same principle in that case. Happy to stand corrected.
Think about it this way. If the underlying were liquid, this is an easy arbitrage for anybody not just the ap. Buy the holdings, sell the etf, profit the difference.
Understood, maybe that leads to tighter spreads or bigger bid/ask top of the book sizes i.e. less spread i.e. trading cost for you; but again, the paragraph that I cited in my recent post is pretty clear that the creation and redemption process is between the AP and the sponsor. And again, how would that process that you envision work in real time. The order book is the order book, and the order matching algo does its thing from the order book. Please cite any reference that says otherwise.
I mean you kind of ignored the last sentence in the section you posted where it literally says explicitly that the holding liquidity enhances the etfs liquidity. How can something only enhance the liquidity for the issuer and not the counterparty and why would state street make that point of that were the case.

You're free to interpret that how you like, but it seems pretty clear cut to me and matches my experience buying and selling into illiquid etfs. I don't have a stake in convincing you, but you have all the information I have now.

Personally, I will not trade TYD for that reason, but that shouldn't dissuade anybody that's planning to buy and hold forever. What's a few cents between decades after all
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

adamhg wrote: Fri Nov 12, 2021 6:45 pm
comeinvest wrote: Fri Nov 12, 2021 6:35 pm
adamhg wrote: Fri Nov 12, 2021 6:28 pm
comeinvest wrote: Fri Nov 12, 2021 4:56 pm
Hfearless wrote: Fri Nov 12, 2021 3:57 pm Does that mean Adam’s order immediately caused a WisdomTree-run bot to buy some more of the underlying instruments and to sell him the brand new ETF shares?
Exactly not. I strongly doubt. How would that work? The retail trade is controlled by the order book of the exchange and the matching algo, and the fill of market orders happens based on resting limit orders. Except when the broker routes to a dark pool or ECN, but same principle in that case. Happy to stand corrected.
Think about it this way. If the underlying were liquid, this is an easy arbitrage for anybody not just the ap. Buy the holdings, sell the etf, profit the difference.
Understood, maybe that leads to tighter spreads or bigger bid/ask top of the book sizes i.e. less spread i.e. trading cost for you; but again, the paragraph that I cited in my recent post is pretty clear that the creation and redemption process is between the AP and the sponsor. And again, how would that process that you envision work in real time. The order book is the order book, and the order matching algo does its thing from the order book. Please cite any reference that says otherwise.
I mean you kind of ignored the last sentence in the section you posted where it literally says explicitly that the holding liquidity enhances the etfs liquidity. How can something only enhance the liquidity for the issuer and not the counterparty and why would state street make that point of that were the case.

You're free to interpret that how you like, but it seems pretty clear cut to me and matches my experience buying and selling into illiquid etfs. I don't have a stake in convincing you, but you have all the information I have now.

Personally, I will not trade TYD for that reason, but that shouldn't dissuade anybody that's planning to buy and hold forever. What's a few cents between decades after all
I don't find the citation convincing for your case. I would interpret the last sentence that it indirectly enhances liquidity of the ETF, if the underlying is more liquid, as the dealers and market makers can quote tighter spreads at bigger sizes, as their risk of adverse market movements is smaller. But I don't claim to be correct. Just saying I can't imagine how that process of an AP "intercepting" an order would work. I think the same customer order routing rules that apply to stocks also apply to ETFs.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gtrplayer »

Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

gtrplayer wrote: Sat Nov 13, 2021 9:23 am Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
You can get an idea of performance during crashes using UOPIX and USPIX (+2x and -2x NASDAQ) here.

The results aren't encouraging.
VirtualMuffin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by VirtualMuffin »

gtrplayer wrote: Sat Nov 13, 2021 9:23 am Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
From my understanding It limits the drawdowns because SQQQ is successful when there is drawdowns to TQQQ. The problem with using these two together is it's both impossible for both to go in the same direction. Whilst TMF has a fighting chance of going up at the same time at least some of the time.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

VirtualMuffin wrote: Sat Nov 13, 2021 11:18 am
gtrplayer wrote: Sat Nov 13, 2021 9:23 am Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
From my understanding It limits the drawdowns because SQQQ is successful when there is drawdowns to TQQQ. The problem with using these two together is it's both impossible for both to go in the same direction. Whilst TMF has a fighting chance of going up at the same time at least some of the time.
Correct. The 25% SQQQ just cancels out 25% of TQQQ. You might as well just hold 50/50 TQQQ/CASHX and you'd get better performance since you're not paying that 1% ER on 50% of your portfolio and also no volatility decay.
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

Hydromod wrote: Sat Nov 13, 2021 11:01 am You can get an idea of performance during crashes using UOPIX and USPIX (+2x and -2x NASDAQ) here.

The results aren't encouraging.
But for reasons I absolutely don’t understand I get results which are encouraging.

How is shorting both in equal proportion not only profitable, but better than HFEA by all accounts?
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Hfearless wrote: Sat Nov 13, 2021 2:51 pm
Hydromod wrote: Sat Nov 13, 2021 11:01 am You can get an idea of performance during crashes using UOPIX and USPIX (+2x and -2x NASDAQ) here.

The results aren't encouraging.
But for reasons I absolutely don’t understand I get results which are encouraging.

How is shorting both in equal proportion not only profitable, but better than HFEA by all accounts?
Because when you short an inverse LETF you take on more risk than when you are long a non-inverse LETF. Higher risk = higher reward. When the market declines, an ETF like SQQQ can grow unbounded until the next time you rebalance. It's like holding TQQQ, and then buying more on margin each day when the market declines. (And conversely, selling when the market rises.)

Shorting an inverse 3x ETF works great if the market is volatile, but not declining, since compounding works in your favor rather than against you (volatility decay). Returns for -55% SPXS and -45% TMV look spectacular compared to regular HFEA. But you pay a borrowing fee that's not shown in Portfolio Visualizer and variable, and it can blow up in your face very quickly when the market crashes and result in a margin call. It's also not tax efficient if you have to close any positions, since all realized gains are short-term (although ideally you just never close positions with gains with this approach, and rebalance by shorting more).
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

Semantics wrote: Sat Nov 13, 2021 3:34 pm Because when you short an inverse LETF you take on more risk than when you are long a non-inverse LETF.
Are we talking about the same thing? The backtest is short both the bear and the bull ETF for the same underlying. Somehow Palpatine returns are outrageously high.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Hfearless wrote: Sat Nov 13, 2021 2:51 pm
Hydromod wrote: Sat Nov 13, 2021 11:01 am You can get an idea of performance during crashes using UOPIX and USPIX (+2x and -2x NASDAQ) here.

The results aren't encouraging.
But for reasons I absolutely don’t understand I get results which are encouraging.

How is shorting both in equal proportion not only profitable, but better than HFEA by all accounts?
I don't understand your weights. 50/50 short TQQQ/short SQQQ is 75/75 short UOPIX/short USPIX. So you need a pot of cashx on hand.

here

By the way, that's the first time I've run across PV with the total for a portfolio at -100. I had always assumed 100 was the only valid number. I don't quite know how to interpret that...
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

Hydromod wrote: Sat Nov 13, 2021 4:51 pm I don't understand your weights.
I started with 50% UOPIX, 50% USPIX. Predictably, that gave a slightly negative CAGR. I wondered what would happen if I shorted that, so I entered −50% for both. To my astonishment, that gave me a modestly positive return with very low drawdowns, so I leveraged that.

Does PV make some kind of mistake when calculating short positions?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

gtrplayer wrote: Sat Nov 13, 2021 9:23 am Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
What you are missing is that a LETF that is trying to move perfectly inverse (both in directionality and amount) is not a desirable hedge. If you're going 75% TQQQ, 25% SQQQ, you are just mostly canceling out 50% of your portfolio (25% TQQQ, 25% SQQQ), which is equivalent to about 50% TQQQ, 50% CASHX. (PV backtest). And you can see 50/50 TQQQ/CASHX gives you slightly better returns.

When we look for hedge candidates, we want (mostly) two things: low correlation, AND also have positive expected returns. TMF fits both those traits. SQQQ does have low correlation with TQQQ, but DOES NOT have positive expected returns.

Check out Asset Class Correlations. Really hard to beat the S&P500 and TLT combination.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

Hfearless wrote: Sat Nov 13, 2021 2:51 pm But for reasons I absolutely don’t understand I get results which are encouraging.

How is shorting both in equal proportion not only profitable, but better than HFEA by all accounts?
Yeah, it was an idea I explored (I'm sure others did as well). It seems we get better returns shorting an inverse version for some reason. Example of shorting SPXU (instead of using UPRO). Improved HFEA CAGR by about +4.5%.

But as was pointed out, shorting something means unlimited downside potential The unlimited downside potential I would get when shorting, is enough to scare me off trying to do anything like this in my portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

Sorry, but are you sure you got my point fully? I tested shorting both the inverse and the non-inverse ETFs. It makes no sense but it shows excellent risk-adjusted returns. A fluke of PV calculations or something to look into?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

Hfearless wrote: Sat Nov 13, 2021 5:35 pm Sorry, but are you sure you got my point fully? I tested shorting both the inverse and the non-inverse ETFs. It makes no sense but it shows excellent risk-adjusted returns. A fluke of PV calculations or something to look into?
No, I do not get your point fully, because I don't know what it means to have -100 in "Total" field, so I cannot possibly process it in my head. I'm not sure "The Big Short" is valid in your link.

I fiddled with your link, now this makes a bit more sense.. it's shorting both bull & bear, and the total correctly shows 100%: PV link

Edit: Actually this version would make more sense, because now it's using quarterly rebalancing, which HFEA uses

My previous reply was mostly trying to point out that even if your strategy (shorting both bull & bear LETFs) seem to somehow work, I suspect many of us is not willing to stake our money into shorting leveraged ETFs cuz of unlimited downside potential. Too much risk.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by gtrplayer »

cflannagan wrote: Sat Nov 13, 2021 5:07 pm
gtrplayer wrote: Sat Nov 13, 2021 9:23 am Question - I was messing around with portfolio visualizer and was thinking about HFEA’s idea that TMF acts in the inverse to UPRO and I started thinking about short ETF’s.

For example, according to PV, a portfolio of 75% TQQQ and 25% SQQQ would have been successful and limited drawdowns.

The idea of using a short ETF as the inverse of the leveraged ETF instead of using TMF seems too obvious to me so I’m hoping some people can poke holes in this.
What you are missing is that a LETF that is trying to move perfectly inverse (both in directionality and amount) is not a desirable hedge. If you're going 75% TQQQ, 25% SQQQ, you are just mostly canceling out 50% of your portfolio (25% TQQQ, 25% SQQQ), which is equivalent to about 50% TQQQ, 50% CASHX. (PV backtest). And you can see 50/50 TQQQ/CASHX gives you slightly better returns.

When we look for hedge candidates, we want (mostly) two things: low correlation, AND also have positive expected returns. TMF fits both those traits. SQQQ does have low correlation with TQQQ, but DOES NOT have positive expected returns.

Check out Asset Class Correlations. Really hard to beat the S&P500 and TLT combination.
This makes sense but I would have thought that the 25% wouldn’t entirely be cancelled out for the same reason that a 25% loss followed by a 25% gain does not mean you made up your loss.

But PV does seem to say Hedgefundie found the superior hedge.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

If anything, adding 200% more CASHX makes the anomalous returns more anomalous, not less.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

tomphilly wrote: Thu Nov 11, 2021 10:14 am If you want to reduce TMF exposure but still want to fly by the seat of your pants with epic CAGR's and eye bleeding drawdowns, HFEAWAAH™ (HedgeFundie's Excellent Adventure With An Alternate Hedge) is for you - PV. I've been running it since Jan.
What would the estimated drawdown have been during the GFC with that alternative hedge portfolio?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 000 »

I wonder if HEDGEFUNDIE will ever return with an update.

Has anyone been in contact with him (by PM or on another forum)?

Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Noobvestor »

I see more and more folks on this forum and others aiming for leverage based on this thread. And most aren't limiting to part of a strategy to a subset of holdings (as many advocate) - they're seeing how far they can leverage for max gains (at least while this bull market lasts). This worries me.

[Edited to delete some commentary]
Last edited by Noobvestor on Sun Nov 14, 2021 2:30 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

Noobvestor wrote: Sun Nov 14, 2021 2:54 am I see more and more folks on this forum and others aiming for leverage based on this thread. And most aren't limiting to part of a strategy to a subset of holdings (as many advocate) - they're seeing how far they can leverage for max gains (at least while this bull market lasts).

Far be it for me to clamp down on useful discussions or even theoretical debates, but it strikes me that these 'Excellent Adventure' threads may be drawing a lot of would-be Bogleheads into inadvisable leveraged positions that in no way reflect the Boglehead ethos.

I'm loathe to just suggest locking this up altogether, but I'm also concerned about irrational exuberance driving increased leverage approaches.

Thoughts?!
Locking this thread would be irresponsible. There are many people invested similarly who are learning and helping from each other. Take that away and you will have people who can't ask questions and make fundamentally poor decisions. If people don't like a thread they don't have to visit it
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LadyGeek »

Let's leave the decision of locking threads for the moderators. If anyone has an opinion, feel free to PM me. Don't post here.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

000 wrote: Sat Nov 13, 2021 11:00 pm Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
I would imagine nothing fundamental has really changed here for the HFEA strategy. I would guess you are referring to raising rate environment? If not that (or of it's a combination of things), what is on your mind?

We had raising rate environment from 2014 to July 2019 - Fed rose rates by about +2.31%.

How did HFEA do during this period? Not so bad as you can see
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

cflannagan wrote: Sun Nov 14, 2021 9:47 am We had raising rate environment from 2014 to July 2019 - Fed rose rates by about +2.31%.

How did HFEA do during this period? Not so bad as you can see
During this time (I shrank the interval to Jan 2016 — Jan 2019), VGIT, IEF, SPTI all grew a little (2.5–3%), while /ZF and /ZN, according to Yahoo data, both fell 4%. Why would that be the case?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

Hfearless wrote: Sun Nov 14, 2021 11:06 am
cflannagan wrote: Sun Nov 14, 2021 9:47 am We had raising rate environment from 2014 to July 2019 - Fed rose rates by about +2.31%.

How did HFEA do during this period? Not so bad as you can see
During this time (I shrank the interval to Jan 2016 — Jan 2019), VGIT, IEF, SPTI all grew a little (2.5–3%), while /ZF and /ZN, according to Yahoo data, both fell 4%. Why would that be the case?
IDK? Did you think we were in the mHFEA thread maybe? Unless I'm mistaken, /ZF and /ZN are intermediate-term treasury futures. In any case, HFEA returns over Jan 2016 to Jan 2019, +19.43% CAGR

Edit: Separated UPRO and TMF lines out of HFEA
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zkn »

Hfearless wrote: Sun Nov 14, 2021 11:06 am
cflannagan wrote: Sun Nov 14, 2021 9:47 am We had raising rate environment from 2014 to July 2019 - Fed rose rates by about +2.31%.

How did HFEA do during this period? Not so bad as you can see
During this time (I shrank the interval to Jan 2016 — Jan 2019), VGIT, IEF, SPTI all grew a little (2.5–3%), while /ZF and /ZN, according to Yahoo data, both fell 4%. Why would that be the case?
Yahoo may not include return on collateral for the future contracts. Use the data from S&P Global:
https://www.spglobal.com/spdji/en/indic ... /#overview
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

privatefarmer wrote: Sat Nov 13, 2021 10:30 pm
tomphilly wrote: Thu Nov 11, 2021 10:14 am If you want to reduce TMF exposure but still want to fly by the seat of your pants with epic CAGR's and eye bleeding drawdowns, HFEAWAAH™ (HedgeFundie's Excellent Adventure With An Alternate Hedge) is for you - PV. I've been running it since Jan.
What would the estimated drawdown have been during the GFC with that alternative hedge portfolio?
I'm not sure - but I would estimate around -70% given its recent drawdowns are around 1% higher than HFEA 60/40. I don't know if there's a dataset that can be loaded into PV to simulate VIXY or VXX going back to 1993 but it would be great to play with.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Hfearless wrote: Sat Nov 13, 2021 3:47 pm
Semantics wrote: Sat Nov 13, 2021 3:34 pm Because when you short an inverse LETF you take on more risk than when you are long a non-inverse LETF.
Are we talking about the same thing? The backtest is short both the bear and the bull ETF for the same underlying. Somehow Palpatine returns are outrageously high.
You are right, I misinterpreted the UOPIX position as being long. But this looks even harder to implement in practice - will a broker really let you short 3.5x the liquidation value of the portfolio? Even ignoring margin calls, consider what happens in a black swan event where UOPIX drops to say 1/5x its original value (35%), and meanwhile USPIX increases 5x (875%). In this example you would now owe 910% of the original portfolio value in borrowed shares. You might still have the original 100% around in cash, plus the 350% raised from the short sales, but that still leaves you with 460% short of being able to meet your debt obligations. Even a 50% crash in the 2x fund is trouble.

What I think this is essentially doing is shorting (harvesting) the volatility decay that you'd experience if you went long in both of these funds. But the mechanism by which this is achieved is that your exposure greatly increases during a crash (or for that matter a huge melt-up), when the -175:-175 ratio gets thrown way out of whack so that you are effectively only short one of the positions. It's an implicit implementation of a buy the dip sell the rip strategy -- which works great until the dip is so deep you run out of chips.

This doesn't even touch on stock borrowing fees; for most pairs 3.5x the stock borrowing fee is going to take a chunk out of the returns that PV doesn't show.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

So if the fed raises rates suddenly to combat inflation I assume that would be really bad for HFEA, right? rates go up so TMF should drop and the market would likely drop as well.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

chrisdds98 wrote: Sun Nov 14, 2021 9:46 pm So if the fed raises rates suddenly to combat inflation I assume that would be really bad for HFEA, right? rates go up so TMF should drop and the market would likely drop as well.
Only if the rate increase is unexpected.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

Semantics wrote: Sun Nov 14, 2021 9:55 pm
chrisdds98 wrote: Sun Nov 14, 2021 9:46 pm So if the fed raises rates suddenly to combat inflation I assume that would be really bad for HFEA, right? rates go up so TMF should drop and the market would likely drop as well.
Only if the rate increase is unexpected.
i would assume UPRO and TMF would drop the moment people realized a change in policy is going to occur.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

chrisdds98 wrote: Sun Nov 14, 2021 10:22 pm
Semantics wrote: Sun Nov 14, 2021 9:55 pm
chrisdds98 wrote: Sun Nov 14, 2021 9:46 pm So if the fed raises rates suddenly to combat inflation I assume that would be really bad for HFEA, right? rates go up so TMF should drop and the market would likely drop as well.
Only if the rate increase is unexpected.
i would assume UPRO and TMF would drop the moment people realized a change in policy is going to occur.
EXACTLY. This is a fundamental point that I don’t think many realize. Everything is already priced into the securities. Everything. The market already expects a certain amount of inflation going forward it would only be UNEXPECTED higher inflation that would harm TMF just as it would be UNEXPECTED drop in earnings that would harm UPRO. We could have inflation but if it is LESS than expected TMF could have a banner year, as an example.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

privatefarmer wrote: Sun Nov 14, 2021 10:30 pm
chrisdds98 wrote: Sun Nov 14, 2021 10:22 pm
Semantics wrote: Sun Nov 14, 2021 9:55 pm
chrisdds98 wrote: Sun Nov 14, 2021 9:46 pm So if the fed raises rates suddenly to combat inflation I assume that would be really bad for HFEA, right? rates go up so TMF should drop and the market would likely drop as well.
Only if the rate increase is unexpected.
i would assume UPRO and TMF would drop the moment people realized a change in policy is going to occur.
EXACTLY. This is a fundamental point that I don’t think many realize. Everything is already priced into the securities. Everything. The market already expects a certain amount of inflation going forward it would only be UNEXPECTED higher inflation that would harm TMF just as it would be UNEXPECTED drop in earnings that would harm UPRO. We could have inflation but if it is LESS than expected TMF could have a banner year, as an example.
So, this is mostly true, but there is a small nuance here that is often overlooked; just because a specific outcome is expected and priced into the market, doesn't mean that when that outcome actually happens, it won't have an effect on the market.

That's probably confusing. Let me give an example:
Suppose Congress has a STRONG CHANCE (say, 80%) to pass a bill that, if passed, is good for the equities market. The market learns of this, and increases 2% accordingly. Then the bill passes, and the market increases another 0.5% immediately as a result. Why did the market increase an additional 0.5%? Simple: the original increase of 2% was based on the strong chance of the bill passing, while the additional 0.5% gain was due to that "strong chance" becoming 100%. It accounts for the elimination of outlier events.

My point is that, just because something is expected, doesn't mean it won't affect the market once it actually happens, because, in an efficient market, the market should be pricing in outlier outcomes as well.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

DMoogle wrote: Sun Nov 14, 2021 10:38 pm So, this is mostly true, but there is a small nuance here that is often overlooked; just because a specific outcome is expected and priced into the market, doesn't mean that when that outcome actually happens, it won't have an effect on the market.

That's probably confusing. Let me give an example:
Suppose Congress has a STRONG CHANCE (say, 80%) to pass a bill that, if passed, is good for the equities market. The market learns of this, and increases 2% accordingly. Then the bill passes, and the market increases another 0.5% immediately as a result. Why did the market increase an additional 0.5%? Simple: the original increase of 2% was based on the strong chance of the bill passing, while the additional 0.5% gain was due to that "strong chance" becoming 100%. It accounts for the elimination of outlier events.

My point is that, just because something is expected, doesn't mean it won't affect the market once it actually happens, because, in an efficient market, the market should be pricing in outlier outcomes as well.
Beat me to it. This is very critical. Just because an event is expected to occur doesn't mean that there is no opportunity for profit remaining. Case in point was the Fed meeting 2 weeks ago. They did exactly what they've been saying they were going to do for at least the past 2 months and yet when it was confirmed, markets still rocketed up.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

tomphilly wrote: Sun Nov 14, 2021 8:00 pm
privatefarmer wrote: Sat Nov 13, 2021 10:30 pm
tomphilly wrote: Thu Nov 11, 2021 10:14 am If you want to reduce TMF exposure but still want to fly by the seat of your pants with epic CAGR's and eye bleeding drawdowns, HFEAWAAH™ (HedgeFundie's Excellent Adventure With An Alternate Hedge) is for you - PV. I've been running it since Jan.
What would the estimated drawdown have been during the GFC with that alternative hedge portfolio?
I'm not sure - but I would estimate around -70% given its recent drawdowns are around 1% higher than HFEA 60/40. I don't know if there's a dataset that can be loaded into PV to simulate VIXY or VXX going back to 1993 but it would be great to play with.
VIX futures were only created in Mar 2004 so that's the earliest you'd be able to simulate back until. Here's a source that has the daily sims for free (without formula) if you trust their methodology: https://investing.kuchita.com/2011/08/2 ... arch-2003/

You can also find daily UPRO and TMF sims back until the late 80s in the simulating LETFs thread here. I ran the combinations with UPRO/TMF/VXX (same implementation as VIXY - can verify results on PV), and couldn't find any allocation of VXX that outperformed HFEA by either total return or risk adjusted returns
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

adamhg wrote: Sun Nov 14, 2021 11:47 pm couldn't find any allocation of VXX that outperformed HFEA by either total return or risk adjusted returns
Were there any that were close enough to be useful for diversification purposes?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Hfearless wrote: Mon Nov 15, 2021 5:44 am
adamhg wrote: Sun Nov 14, 2021 11:47 pm couldn't find any allocation of VXX that outperformed HFEA by either total return or risk adjusted returns
Were there any that were close enough to be useful for diversification purposes?
UPRO/TMF/VIXY 70/25/5 has outperformed HFEA 55/45 & 60/40 since the March 2020 crash - PV. I wouldn't run it for years, though. I'm just employing it as a short to medium term modification to HFEA given all the uncertainty around TMF.

On an unrelated note, "Morgan Stanley Says Steer Clear of U.S. Stocks and Bonds in 2022" - Morgan Stanley is recommending underweight US and overweight EU for 2023 - would any folks here consider replacing some UPRO for EURL (3x Europe ETF) in light of this prediction?
Last edited by tomphilly on Mon Nov 15, 2021 9:09 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

tomphilly wrote: Mon Nov 15, 2021 9:01 am
Hfearless wrote: Mon Nov 15, 2021 5:44 am
adamhg wrote: Sun Nov 14, 2021 11:47 pm couldn't find any allocation of VXX that outperformed HFEA by either total return or risk adjusted returns
Were there any that were close enough to be useful for diversification purposes?
UPRO/TMF/VIXY 70/25/5 has outperformed HFEA 55/45 & 60/40 since the March 2020 crash - PV. I wouldn't run it for years, though. I'm just employing it as a short to medium term modification to HFEA given all the uncertainty around TMF.
And under what circumstances is that uncertainty going to alleviate? What indicators are you looking for to revert back to TMF?
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