HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by firebirdparts »

This isn't the answer you're looking for, but I choose to believe gold price movement is random. It's volatile and random. If you're looking for uncorrelated assets, then the randomness is okay.

I think it's okay to say you expect it to have a zero % real return because it has proven to do so over about 10,000 years, but the factors that could give it any specific value are nonsense, so you're very reliant on tradition here.

So I think it's okay to say that is "should" have zero real return, but deep in your soul you can be thinking that within a 30 year window of interest (for example) it may do something really strange, and maybe twice.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

tradri wrote: Wed Apr 14, 2021 10:28 am
DMoogle wrote: Wed Apr 14, 2021 10:23 am It's worth noting that, just as Sharpe ratio changes when you introduce leverage, an optimal portfolio asset allocation will change with leverage as well.

Reason being: leverage isn't free, hence your return will be lower with disproportionately more risk (relative to an unleveraged portfolio), hence the efficient frontier curve transforms. If 7.5% gold is recommended in an unleveraged portfolio, maybe 2% or 0% would be the equivalent in a 2x leveraged portfolio. I'm making the numbers up obviously, but the point is that it doesn't scale linearly... more like piecewise linear.
This isn't entirely true. Comparing different stocks/bonds/gold allocations in the Simba backtesting spreadsheet, 55/25/20 3x stocks/bonds/gold had the highest CAGR from 1969 to 2020. Holding uncorrelated assets is even more important in a leveraged ETF portfolio than in an unleveraged portfolio.
I didn't mean to imply that you'd need to hold less or more gold in a leveraged portfolio, only that the optimal asset allocation would be different than an unleveraged portfolio, because the risk:return ratio is different once leverage is introduced.

What "optimal asset allocation" means will vary depending on the investor - whether they're focused on maximizing return, minimizing risk, or more likely some combination of the two. But whatever their definition, the optimal allocation for a leveraged portfolio will be different.

Simple example: if the optimal asset allocation for an investor is 60/40 stocks:bonds in unleveraged, whether they're 50% invested in it or 100% invested in it, it will almost certainly be different than 60/40 if they want to be 150% invested.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

firebirdparts wrote: Wed Apr 14, 2021 12:09 pm This isn't the answer you're looking for, but I choose to believe gold price movement is random. It's volatile and random. If you're looking for uncorrelated assets, then the randomness is okay.

I think it's okay to say you expect it to have a zero % real return because it has proven to do so over about 10,000 years, but the factors that could give it any specific value are nonsense, so you're very reliant on tradition here.

So I think it's okay to say that is "should" have zero real return, but deep in your soul you can be thinking that within a 30 year window of interest (for example) it may do something really strange, and maybe twice.
If movement is random and is expected to have zero real return, why not just keep the allocation in cash (money market or whatever)? Cash should have 0 real return (I think? Not 100% sure on that) and has no volatility. Seems like under those assumptions, adding gold just adds needless volatility without any benefit.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

firebirdparts wrote: Wed Apr 14, 2021 12:09 pm This isn't the answer you're looking for, but I choose to believe gold price movement is random. It's volatile and random. If you're looking for uncorrelated assets, then the randomness is okay.

I think it's okay to say you expect it to have a zero % real return because it has proven to do so over about 10,000 years, but the factors that could give it any specific value are nonsense, so you're very reliant on tradition here.

So I think it's okay to say that is "should" have zero real return, but deep in your soul you can be thinking that within a 30 year window of interest (for example) it may do something really strange, and maybe twice.
On a macro level, I wouldn't agree that the price movement is entirely random. After all, I think it's well-known that commodities tend to do well in periods of high inflation, and gold is just a commodity, with the added feature that it has been a store of value for thousands of years.

This is more on the side of behavioral finance, but when people see that the economy is doing poorly and that the central bank doesn't have the means to further stimulate the economy (aka stagflation), people will probably get worried and turn to some "safe haven" asset like gold.
Last edited by tradri on Wed Apr 14, 2021 12:28 pm, edited 2 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

DMoogle wrote: Wed Apr 14, 2021 12:11 pm I didn't mean to imply that you'd need to hold less or more gold in a leveraged portfolio, only that the optimal asset allocation would be different than an unleveraged portfolio, because the risk:return ratio is different once leverage is introduced.

What "optimal asset allocation" means will vary depending on the investor - whether they're focused on maximizing return, minimizing risk, or more likely some combination of the two. But whatever their definition, the optimal allocation for a leveraged portfolio will be different.

Simple example: if the optimal asset allocation for an investor is 60/40 stocks:bonds in unleveraged, whether they're 50% invested in it or 100% invested in it, it will almost certainly be different than 60/40 if they want to be 150% invested.
Yes, that's true. That's why I think it's very important to backtest these kinds of things to see what the return/risk would have been. (and hope that the past is a reasonably good predictor of the future)
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

DMoogle wrote: Wed Apr 14, 2021 12:13 pm If movement is random and is expected to have zero real return, why not just keep the allocation in cash (money market or whatever)? Cash should have 0 real return (I think? Not 100% sure on that) and has no volatility. Seems like under those assumptions, adding gold just adds needless volatility without any benefit.
Unlike cash, the nominal return of gold isn't 0.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BayStater »

tradri wrote: Wed Apr 14, 2021 11:37 am By alternatives, I assume you mean TIPS? I haven't seen a 3x leveraged ETF on TIPS yet, and they seem to have a higher correlation to stocks than gold does, according to the asset class correlation matrix I linked above.
Historical correlation or not. I'd put more faith in the government backing that says TIPS will adjust according to inflation. At least more than speculating that gold might. If only there were a leveraged TIPS fund.

viewtopic.php?t=278279
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

BayStater wrote: Wed Apr 14, 2021 1:36 pm
tradri wrote: Wed Apr 14, 2021 11:37 am By alternatives, I assume you mean TIPS? I haven't seen a 3x leveraged ETF on TIPS yet, and they seem to have a higher correlation to stocks than gold does, according to the asset class correlation matrix I linked above.
Historical correlation or not. I'd put more faith in the government backing that says TIPS will adjust according to inflation. At least more than speculating that gold might. If only there were a leveraged TIPS fund.

viewtopic.php?t=278279
It's a little more work but you can just do the 3x yourself w/ calls on the etf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

BayStater wrote: Wed Apr 14, 2021 1:36 pm
tradri wrote: Wed Apr 14, 2021 11:37 am By alternatives, I assume you mean TIPS? I haven't seen a 3x leveraged ETF on TIPS yet, and they seem to have a higher correlation to stocks than gold does, according to the asset class correlation matrix I linked above.
Historical correlation or not. I'd put more faith in the government backing that says TIPS will adjust according to inflation. At least more than speculating that gold might. If only there were a leveraged TIPS fund.
viewtopic.php?t=278279
You bring up a good point. :idea:

I was recently pondering the approach we often tend to: looking purely at the mathematical relationships between the different assets, the cold hard numbers (i.e. correlation, volatility etc.). It's good to take into account the "subjective" (maybe not the best word here) aspects of the assets, as well.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Gufomel »

It’s looking like a soaring day for the Hedgefundie adventure!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

TMF jumping today. Some of my losses have come unlost.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

I wonder why LTT are popping so much today. :shock:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

rchmx1 wrote: Thu Apr 15, 2021 9:41 am I wonder why LTT are popping so much today. :shock:
Something, something about hedge funds backing off their shorts on the treasuries. Maybe.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Gufomel wrote: Thu Apr 15, 2021 9:29 am It’s looking like a soaring day for the Hedgefundie adventure!
Yeah, it's being nice the last few days where LTT isn't a drag on portfolio performance 8-) TMF to the moon??? :wink:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

dziuniek wrote: Thu Apr 15, 2021 11:39 am
rchmx1 wrote: Thu Apr 15, 2021 9:41 am I wonder why LTT are popping so much today. :shock:
Something, something about hedge funds backing off their shorts on the treasuries. Maybe.
Interesting. Think I'll hunt around for info when I have a chance later today.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by occambogle »

For the first time in a long time.... some nice LTT / TMF action today.... EDV up 2.7% and TMF up 6.0%...
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

rchmx1 wrote: Thu Apr 15, 2021 9:41 am I wonder why LTT are popping so much today. :shock:
Equities have been going up a lot recently too. Expected returns on equities going down means investors will demand lower returns on bonds too.

Looks like the markets are levering back up after levering down a bit in Feb/March.

If earnings beat expectations I would expect money to flow from treasuries to equities. If they fall short, then my worry is we'll see levering down again and both components will fall. So treasuries still seem scary to me.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

Semantics wrote: Thu Apr 15, 2021 1:22 pm
rchmx1 wrote: Thu Apr 15, 2021 9:41 am I wonder why LTT are popping so much today. :shock:
Equities have been going up a lot recently too. Expected returns on equities going down means investors will demand lower returns on bonds too.

Looks like the markets are levering back up after levering down a bit in Feb/March.

If earnings beat expectations I would expect money to flow from treasuries to equities. If they fall short, then my worry is we'll see levering down again and both components will fall. So treasuries still seem scary to me.
I appreciate the insight as always. I'm also still skeptical about stocking back up on insurance. I'm still at around only 10% of my HFEA in insurance since selling off most of it last summer, which is certainly risky but so far the risk has felt tolerable.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

To be honest, I kind of changed my mind about including 3x gold in a leveraged ETF portfolio.

The backtests show that such an ETF would have produced a -7.13% annual CAGR from 1969 to 2020. While it did completely save the portfolio from 1970 to 1980, it was mostly a drag on the performance in all the other years. It all depends so much on the start/end date one choses for the backtest.

Therefore, I think I'm willing to take the bet that high inflation won't happen anytime soon, in favor of not holding an asset that has a -7.13% annual CAGR.

Let's hope 70/30 3x stocks/treasuries do as well in the future as they have in the past. :beer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AnilG »

DMoogle wrote: Wed Apr 14, 2021 12:11 pm I didn't mean to imply that you'd need to hold less or more gold in a leveraged portfolio, only that the optimal asset allocation would be different than an unleveraged portfolio, because the risk:return ratio is different once leverage is introduced.

What "optimal asset allocation" means will vary depending on the investor - whether they're focused on maximizing return, minimizing risk, or more likely some combination of the two. But whatever their definition, the optimal allocation for a leveraged portfolio will be different.

Simple example: if the optimal asset allocation for an investor is 60/40 stocks:bonds in unleveraged, whether they're 50% invested in it or 100% invested in it, it will almost certainly be different than 60/40 if they want to be 150% invested.
Can you explain the paragraph bolded. How would leveraging both stock and bond 3x will require change in asset allocation from unleveraged stock and bond? I maintain 60:40 stock:bond allocation in both my unleveraged and leveraged portion of the portfolio. I see leverage as just increasing the beta of portfolio. It doesn’t need a new asset allocation except rebalancing to accommodate differences in volatility decay between stock and bond.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

AnilG wrote: Thu Apr 15, 2021 11:41 pmCan you explain the paragraph bolded. How would leveraging both stock and bond 3x will require change in asset allocation from unleveraged stock and bond? I maintain 60:40 stock:bond allocation in both my unleveraged and leveraged portion of the portfolio. I see leverage as just increasing the beta of portfolio. It doesn’t need a new asset allocation except rebalancing to accommodate differences in volatility decay between stock and bond.
You do 60:40 because you (correctly) think that it's a reasonable risk:reward ratio for your purposes, right? Totally reasonable approach. However, that risk:reward ratio is NOT constant if using leverage, even putting volatility decay aside. The reason is simple; leverage isn't free (and in reality, it's more expensive than the theoretical "risk-free rate"). The most prominent costs are the expense ratio (explicitly stated in a LETF) and the borrowing costs (floating rate not always stated). These costs lower your return without lowering risk... hence distorting the risk:reward ratio once leverage is introduced.

So, bottom line, if 60/40 is optimal for a nonleveraged portfolio (to, say, maximize Sharpe or some other risk:return metric), then it's likely something else is 2x or 3x. I'd guess more weight on the stocks, since bonds have lower expected return (so they'll "feel" the effects of lowered returns even more, relative to their risk).
Last edited by DMoogle on Fri Apr 16, 2021 8:15 am, edited 2 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by millennialblues »

has anyone tested how finance sector or banks respond to inflation? my guess would be that they’re more predictable than gold. consumer commodities are also sometimes a safe haven, though they’re less predictable i think.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

millennialblues wrote: Fri Apr 16, 2021 12:07 am has anyone tested how finance sector or banks respond to inflation? my guess would be that they’re more predictable than gold. consumer commodities are also sometimes a safe haven, though they’re less predictable i think.
There was some discussion of financial 3x earlier in this thread. Regardless of how they might perform in a rising rating environment, there are other considerations to take into account. For instance, we already have exposure to financial companies with UPRO, so this would become more of a sector bet than inflation protection. Also, financial stocks have serious risks with other types of calamities beyond rising inflation. Imagine something like the sub-prime mortgage crisis. Definitely wouldn't want to be holding a 3x financials etf during something like that.

I think that the only possible role such an LEFT could play would be as part of a momentum type strategy, where some number of LEFTs are rotated depending upon predetermined factors. But that brings with it a whole new bag of worms to contend with.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

rchmx1 wrote: Fri Apr 16, 2021 12:42 am
millennialblues wrote: Fri Apr 16, 2021 12:07 am has anyone tested how finance sector or banks respond to inflation? my guess would be that they’re more predictable than gold. consumer commodities are also sometimes a safe haven, though they’re less predictable i think.
There was some discussion of financial 3x earlier in this thread. Regardless of how they might perform in a rising rating environment, there are other considerations to take into account. For instance, we already have exposure to financial companies with UPRO, so this would become more of a sector bet than inflation protection. Also, financial stocks have serious risks with other types of calamities beyond rising inflation. Imagine something like the sub-prime mortgage crisis. Definitely wouldn't want to be holding a 3x financials etf during something like that.

I think that the only possible role such an LEFT could play would be as part of a momentum type strategy, where some number of LEFTs are rotated depending upon predetermined factors. But that brings with it a whole new bag of worms to contend with.
Thanks for mentioning that. I tried to find the mentions of the financial sectors fund discussed, by searching for keywords, but I couldn't retrace that exchange.

The FAS ETF can be extremely volatile and is open to other risks, like you mentioned. If it had existed during the GFC, it would have definitely imploded. Even VFH had a 75% drawdown at the time. To be fair, though, that's looking at it in isolation, which does not make much sense.

If you're just overweighting it a bit to protect against potential inflation, then it should benefit you. I unfortunately don't know how to replicate data for something like VFH and FAS into periods of truly high, and sustained inflation.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

I am sure the question of dealing with higher-than-expected inflation isn't anything new.

How has the OG Jack Bogle dealt with that? From what I know he always recommended the standard stock/bond portfolio.

So following this logic, should we even worry about such a scenario, when even the standard Bogleheads portfolio isn't concerned about that?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

OohLaLa wrote: Fri Apr 16, 2021 1:34 am
rchmx1 wrote: Fri Apr 16, 2021 12:42 am There was some discussion of financial 3x earlier in this thread. Regardless of how they might perform in a rising rating environment, there are other considerations to take into account. For instance, we already have exposure to financial companies with UPRO, so this would become more of a sector bet than inflation protection. Also, financial stocks have serious risks with other types of calamities beyond rising inflation. Imagine something like the sub-prime mortgage crisis. Definitely wouldn't want to be holding a 3x financials etf during something like that.

I think that the only possible role such an LEFT could play would be as part of a momentum type strategy, where some number of LEFTs are rotated depending upon predetermined factors. But that brings with it a whole new bag of worms to contend with.
Thanks for mentioning that. I tried to find the mentions of the financial sectors fund discussed, by searching for keywords, but I couldn't retrace that exchange.

The FAS ETF can be extremely volatile and is open to other risks, like you mentioned. If it had existed during the GFC, it would have definitely imploded. Even VFH had a 75% drawdown at the time. To be fair, though, that's looking at it in isolation, which does not make much sense.

If you're just overweighting it a bit to protect against potential inflation, then it should benefit you. I unfortunately don't know how to replicate data for something like VFH and FAS into periods of truly high, and sustained inflation.
It wasn't an in depth discussion. No attempts at simulating or anything. I think my summary covered everything that was brought up, so there could certainly be more to say on the subject. I guess my personal feeling is that it would be a sector bet, and I don't feel like I'm a sophisticated enough investor to make those kinds of decisions without them being more than just a blind shot.
tradri wrote: Fri Apr 16, 2021 5:12 am I am sure the question of dealing with higher-than-expected inflation isn't anything new.

How has the OG Jack Bogle dealt with that? From what I know he always recommended the standard stock/bond portfolio.

So following this logic, should we even worry about such a scenario, when even the standard Bogleheads portfolio isn't concerned about that?
I mean, ultimately that's what drew me to this strategy (underpinned by the idea of lifecycle investing). We're adding leverage to the most legitimate approach to portfolio construction that exists. That type of risk seems different in kind than other ways of attempting to capture excess returns, like stock picking, sector betting, market timing, etc. With a conventional stock/bond B&H approach, you expect to encounter different market conditions over the course of the decades you'll be investing, and in some of those periods there will have been something better than your AA, but evened out over the long run your stock/bond AA will stack up very well against the market as a whole. I guess the one difference here is that it might be appropriate to have an exit strategy for very extreme market conditions, but the people who have been in this strategy since 2019 and so experienced UPRO dropping from ~$75 to ~$20 in Feb-March 2020 have still come out just fine by holding onto their AA. So I guess I just feel like there has to be a very good reason to make fundamental modifications to the strategy.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

rchmx1 wrote: Fri Apr 16, 2021 9:06 am I mean, ultimately that's what drew me to this strategy (underpinned by the idea of lifecycle investing). We're adding leverage to the most legitimate approach to portfolio construction that exists
This is what drew me to the strategy too
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Fri Apr 16, 2021 9:06 am
I mean, ultimately that's what drew me to this strategy (underpinned by the idea of lifecycle investing). We're adding leverage to the most legitimate approach to portfolio construction that exists. That type of risk seems different in kind than other ways of attempting to capture excess returns, like stock picking, sector betting, market timing, etc. With a conventional stock/bond B&H approach, you expect to encounter different market conditions over the course of the decades you'll be investing, and in some of those periods there will have been something better than your AA, but evened out over the long run your stock/bond AA will stack up very well against the market as a whole. I guess the one difference here is that it might be appropriate to have an exit strategy for very extreme market conditions, but the people who have been in this strategy since 2019 and so experienced UPRO dropping from ~$75 to ~$20 in Feb-March 2020 have still come out just fine by holding onto their AA. So I guess I just feel like there has to be a very good reason to make fundamental modifications to the strategy.
I totally agree. Stocks and treasuries are the most uncorrelated assets out there, so applying leverage to that should work great. (assuming the future is anything like the past)

For me, I think the exit strategy will be when I am starting to think about retiring with that money. (probably a couple of years before that)

The only thing I am willing to modify is the asset allocation, since 70/30 3x stocks/treasuries had a higher CAGR in the backtest from 1955 to 2020.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

tradri wrote: Fri Apr 16, 2021 9:44 am I totally agree. Stocks and treasuries are the most uncorrelated assets out there, so applying leverage to that should work great. (assuming the future is anything like the past)

For me, I think the exit strategy will be when I am starting to think about retiring with that money. (probably a couple of years before that)

The only thing I am willing to modify is the asset allocation, since 70/30 3x stocks/treasuries had a higher CAGR in the backtest from 1955 to 2020.
I feel the same re exit strategy I think. I'm still decades off, so plenty of time to do more research, but lifecycle investing seems to offer a well-developed system for deleveraging in an optimal way. Just need to read into it further.

The only other thing I've done is set up a chart in Trader Workstation to present various moving averages, but at this point it's only another way to watch the rise and fall of the market. I have no idea if any consistently reliable insight can be found there. 2020 was unique with how much market movements during the recovery seemed to involve profit taking after a few up days and buying the dip cycles. I took a conservative approach to playing that game, and it did greatly increase my CAGR during my first year of being in a modified HFEA, but I'm not sure it's smart to continue taking such a messy approach.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Fri Apr 16, 2021 10:20 am
I feel the same re exit strategy I think. I'm still decades off, so plenty of time to do more research, but lifecycle investing seems to offer a well-developed system for deleveraging in an optimal way. Just need to read into it further.

The only other thing I've done is set up a chart in Trader Workstation to present various moving averages, but at this point it's only another way to watch the rise and fall of the market. I have no idea if any consistently reliable insight can be found there. 2020 was unique with how much market movements during the recovery seemed to involve profit taking after a few up days and buying the dip cycles. I took a conservative approach to playing that game, and it did greatly increase my CAGR during my first year of being in a modified HFEA, but I'm not sure it's smart to continue taking such a messy approach.
The problem I see with such market-timing strategies (apart from the fact that many smart people claim it doesn't work) is that I haven't heard a good theoretical explanation for why they should work.

If everybody knows a stock is going to fall tomorrow...it will already fall today, right?

Maybe you can give me a theoretical explanation for why it makes sense?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

tradri wrote: Fri Apr 16, 2021 10:40 am The problem I see with such market-timing strategies (apart from the fact that many smart people claim it doesn't work) is that I haven't heard a good theoretical explanation for why they should work.

If everybody knows a stock is going to fall tomorrow...it will already fall today, right?

Maybe you can give me a theoretical explanation for why it makes sense?
I agree 100%. I think if you do enough of this you're almost guaranteed to underperform. But like I said, at least to me the 2020 recovery seemed different enough with a cyclical sell after an extended pop/buy the dip that I felt like taking part, I just tried to be conservative about it. For every 4-5 times I thought it might be a good idea to sell some portion of UPRO after an extended pop, I'd actually do it once. And on the chance that I'd be wrong, I would only sell a portion, not every share. It worked out well, but I'm feeling pretty strongly about moving back to a more conventional/disciplined version of the HFEA. I'm mainly waiting for the smoke to clear with TMF before I load back up on the insurance.

In terms of theoretical explanations that people who are more confident in such a market timing approach might rely on as justification?

1) Possibly market movements have large-sized leaders, with the rest of us little guys only as followers? So for us little guys, its about predicting when the big guys will make their move so we can align our choices with theirs and so benefit from the movement their choices cause as opposed to just riding the wave.

2) If enough people are taking technical analysis seriously, and so are all staring at their charts to see when the 15 day SMA moves below the 50 day etc/whatever, then we're all waiting for the same moment, and such a moment would happen when it happens. If it didn't happen the previous day, then that's not when you would have made the move.

But I'm as firmly convinced as I think I can be that if you go all in on this type of strategy you're destined to underperform. So making that decision seems like clear folly. For me, then, the question is whether any of this can provide any reliable actionable insight for capturing excess returns, as opposed to being a complete system to adopt.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Fri Apr 16, 2021 11:03 am
I agree 100%. I think if you do enough of this you're almost guaranteed to underperform. But like I said, at least to me the 2020 recovery seemed different enough with a cyclical sell after an extended pop/buy the dip that I felt like taking part, I just tried to be conservative about it. For every 4-5 times I thought it might be a good idea to sell some portion of UPRO after an extended pop, I'd actually do it once. And on the chance that I'd be wrong, I would only sell a portion, not every share. It worked out well, but I'm feeling pretty strongly about moving back to a more conventional/disciplined version of the HFEA. I'm mainly waiting for the smoke to clear with TMF before I load back up on the insurance.

In terms of theoretical explanations that people who are more confident in such a market timing approach might rely on as justification?

1) Possibly market movements have large-sized leaders, with the rest of us little guys only as followers? So for us little guys, its about predicting when the big guys will make their move so we can align our choices with theirs and so benefit from the movement their choices cause as opposed to just riding the wave.

2) If enough people are taking technical analysis seriously, and so are all staring at their charts to see when the 15 day SMA moves below the 50 day etc/whatever, then we're all waiting for the same moment, and such a moment would happen when it happens. If it didn't happen the previous day, then that's not when you would have made the move.

But I'm as firmly convinced as I think I can be that if you go all in on this type of strategy you're destined to underperform. So making that decision seems like clear folly. For me, then, the question is whether any of this can provide any reliable actionable insight for capturing excess returns, as opposed to being a complete system to adopt.
1) Yes, but if everybody knows what the "big guys" are up to, shouldn't the market adjust beforehand accordingly? Isn't this the same as the myth that stocks experience a price bump when they are added to a major index? In fact, the stocks experience a price bump before they are added to the index, because everybody knows they will be added. (at least that's what I have heard)

2) If people know that many other people are following such patterns, they will sell just before everybody else sells and buy just before everybody else buys.

I think it's fundamentally a game theory problem, as each participant is trying to outsmart/front-run the other participant.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LTCM »

Possibly market movements have large-sized leaders, with the rest of us little guys only as followers?
I tend to think the opposite actually. Small traders should be more nimble than large traders. Unwinding a huge position takes time. Front running another trader with a huge position involves borrowing costs. Small traders with neither if these problems should find it easier.

I still don't think there is much room for market timing myself but I think it's easier to market time a small position.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

I've been doing a little experimenting to verify the unpredictability of forecasting based on recent history. For example, does recent volatility give any predictive capability on the time scales that I can trade?

It's pretty clear that daily variation is not normally distributed in any of the funds I've looked at, as is well known. Even the Laplace distribution appears to underestimate the tails by a wide margin, although it's pretty reasonable for the smaller moves that occur frequently enough to happen within most quarters.

I haven't yet seen a statistical bias in either the size or direction of future moves over various periods ranging from a day on up, given lookbacks from a week to a quarter. I've looked at indexes, long-term ETFs, gold, commodities. There is some hint of predictability for longer periods, maybe, but I'd be hard pressed to thing that any signal would be large enough to be actionable. I haven't looked at momentum yet, but I don't think volatility gives an actionable estimate of future returns.

This isn't to say that there aren't short-term patterns, but any pattern is destined to disappear.

Without significant predictability, trading cannot be expected to add value, and slippage during trading costs value.

The only predictive measure I've seen that consistently seems to have added value is the unemployment rate, but that wasn't useful for COVID, recent estimates are always inaccurate, and the predictability only operates on the longer time scales.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

LTCM wrote: Fri Apr 16, 2021 11:19 am
Possibly market movements have large-sized leaders, with the rest of us little guys only as followers?
I tend to think the opposite actually. Small traders should be more nimble than large traders. Unwinding a huge position takes time. Front running another trader with a huge position involves borrowing costs. Small traders with neither if these problems should find it easier.

I still don't think there is much room for market timing myself but I think it's easier to market time a small position.
Just to be clear, I'm not arguing that there is good reason to take an open-minded view towards market timing. But what I had in mind are situations like this, from last summer:

https://nypost.com/2020/10/02/wall-stre ... e-is-back/
Masayoshi Son, the 63-year-old founder and CEO of SoftBank, was unmasked as the so-called “Nasdaq Whale” in early September after it was revealed that he plunked down billions to buy options in popular tech stocks like Amazon, Alphabet, Microsoft and Tesla during the COVID market crash. Son’s buying spree — funded by both Softbank and his own pocket — is believed to have helped push the Nasdaq up 60 percent between April and September — contributing to a bubble that came tumbling down at summer’s end.
Another recent example is during the first GME moonshot. During that same period UPRO dropped around 10% and TQQQ around 14%. The theory is that some of these HFs with large short positions had to sell off a large chunk of their long positions, causing or contributing to the dip.

Obviously it's one thing to know that stuff like this is happens, and another thing entirely to derive from that knowledge anything that is remotely actionable. But I do think these serve as examples of what can at least feel like a possible source of insight to someone open to the idea that it is possible time the market.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Hydromod wrote: Fri Apr 16, 2021 11:40 am This isn't to say that there aren't short-term patterns, but any pattern is destined to disappear.

Without significant predictability, trading cannot be expected to add value, and slippage during trading costs value.
This is the important part, any short-term patterns, if profitable, get arbitrage away rather quickly once discovered. It's hard for trading (using the same strategy) to add value over the long term (especially w/ trading cost and potential opportunity cost of staying out of market).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

tradri wrote: Fri Apr 16, 2021 11:15 am 1) Yes, but if everybody knows what the "big guys" are up to, shouldn't the market adjust beforehand accordingly? Isn't this the same as the myth that stocks experience a price bump when they are added to a major index? In fact, the stocks experience a price bump before they are added to the index, because everybody knows they will be added. (at least that's what I have heard)

2) If people know that many other people are following such patterns, they will sell just before everybody else sells and buy just before everybody else buys.

I think it's fundamentally a game theory problem, as each participant is trying to outsmart/front-run the other participant.
I'm only playing devil's advocate here. I feel like we're in total agreement with our skepticism with such arguments. But:

1) Us little guys never "know" what the big guys are up to until after the fact, and often times not even then. So we're left to guess ie gamble. "The market" contains those who decide to take that specific gamble, and those that saw the bet but didn't take it, and those that never saw the bet at all. I have read, and I think it's well-founded, that stocks that rise tend to keep rising (for some period), and stocks that fall tend to keep falling (for some period). So all players in the market are not acting in unison. Some people arrive earlier to the party than others, on the buy and sell side. But this is just an description. I don't know what if anything is actionable about any of this.

2) But on that previous day your chart hasn't given the indicator. Maybe the trend will continue, but maybe it will reverse, and since you don't know what tomorrow will bring the trade's risk is significantly higher, disinclining people from wanting to jump the gun.

I guess my general feeling on this topic is that absolutely there are $20 bills laying on the ground. But due to a cruel twist of fate, you can't know if what you've picked up actually is a $20, or instead is a used hypodermic needle which is going to require a costly doctor's visit, until it's in your hand. The prudent thing might very well be to say that the potential pain is not worth the potential gain, so never bend down at all. But maybe there are ways to be very conservative with how and when you bend down, so as to decrease the frequency of finding that a dirty needle is sticking out of your hand. Personally speaking, I both don't like playing this game of chance, but also don't like the idea of never going for any possible $20 bills.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Fri Apr 16, 2021 5:24 pm I'm only playing devil's advocate here. I feel like we're in total agreement with our skepticism with such arguments. But:

1) Us little guys never "know" what the big guys are up to until after the fact, and often times not even then. So we're left to guess ie gamble. "The market" contains those who decide to take that specific gamble, and those that saw the bet but didn't take it, and those that never saw the bet at all. I have read, and I think it's well-founded, that stocks that rise tend to keep rising (for some period), and stocks that fall tend to keep falling (for some period). So all players in the market are not acting in unison. Some people arrive earlier to the party than others, on the buy and sell side. But this is just an description. I don't know what if anything is actionable about any of this.

2) But on that previous day your chart hasn't given the indicator. Maybe the trend will continue, but maybe it will reverse, and since you don't know what tomorrow will bring the trade's risk is significantly higher, disinclining people from wanting to jump the gun.

I guess my general feeling on this topic is that absolutely there are $20 bills laying on the ground. But due to a cruel twist of fate, you can't know if what you've picked up actually is a $20, or instead is a used hypodermic needle which is going to require a costly doctor's visit, until it's in your hand. The prudent thing might very well be to say that the potential pain is not worth the potential gain, so never bend down at all. But maybe there are ways to be very conservative with how and when you bend down, so as to decrease the frequency of finding that a dirty needle is sticking out of your hand. Personally speaking, I both don't like playing this game of chance, but also don't like the idea of never going for any possible $20 bills.
I think what you are referring to in the first point is momentum. As far as I know, this is one pillar of the five factor model, so maintaining exposure to stocks that have experienced strong momentum in the past (like Tesla right now) should give you a higher risk/reward long-term. (According to factor research) But this isn't market-timing.

Maybe this is just a difference in personality, but I have zero interest in monitoring the markets closely and reading all the news, just so I can try my luck on a couple of trades.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

rchmx1 wrote: Fri Apr 16, 2021 5:24 pm I'm only playing devil's advocate here. I feel like we're in total agreement with our skepticism with such arguments. But:

1) Us little guys never "know" what the big guys are up to until after the fact, and often times not even then. So we're left to guess ie gamble. "The market" contains those who decide to take that specific gamble, and those that saw the bet but didn't take it, and those that never saw the bet at all. I have read, and I think it's well-founded, that stocks that rise tend to keep rising (for some period), and stocks that fall tend to keep falling (for some period). So all players in the market are not acting in unison. Some people arrive earlier to the party than others, on the buy and sell side. But this is just an description. I don't know what if anything is actionable about any of this.

2) But on that previous day your chart hasn't given the indicator. Maybe the trend will continue, but maybe it will reverse, and since you don't know what tomorrow will bring the trade's risk is significantly higher, disinclining people from wanting to jump the gun.

[...]
In 1) you are basically describing momentum and it's the factor that nobody seems able to explain away.

2) Trends don't normally reverse instantaneously, at least if using a reasonable lookback. You can definitely use it to take/ exit positions. A big issue I have is with how both sides of the debate assume that the only reason why one would employ momentum approaches is for max gain, which is just not true.

I think that 99% of members here at Bogleheads.org agree that perfect or near-perfect entry and exit timing is near impossible, if not by sheer luck. We've all seen the stats on active management etc. etc. etc.

3) I think the concept of front-running gets often simplified as well, when used to discredit any non-buy-and-hold approach. It would entail:
- the same exact signals by different market participants (including look-back, when to put in an order etc.)
- the same exact goals at all times, for those participants
- everyone expecting to gain max efficiency/ gain by being first. What if you're ok not finishing first?

Disclaimer: I don't use active methods. Just adding another perspective.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dont_know_mind »

tradri wrote: Fri Apr 16, 2021 11:15 am
rchmx1 wrote: Fri Apr 16, 2021 11:03 am
I agree 100%. I think if you do enough of this you're almost guaranteed to underperform. But like I said, at least to me the 2020 recovery seemed different enough with a cyclical sell after an extended pop/buy the dip that I felt like taking part, I just tried to be conservative about it. For every 4-5 times I thought it might be a good idea to sell some portion of UPRO after an extended pop, I'd actually do it once. And on the chance that I'd be wrong, I would only sell a portion, not every share. It worked out well, but I'm feeling pretty strongly about moving back to a more conventional/disciplined version of the HFEA. I'm mainly waiting for the smoke to clear with TMF before I load back up on the insurance.

In terms of theoretical explanations that people who are more confident in such a market timing approach might rely on as justification?

1) Possibly market movements have large-sized leaders, with the rest of us little guys only as followers? So for us little guys, its about predicting when the big guys will make their move so we can align our choices with theirs and so benefit from the movement their choices cause as opposed to just riding the wave.

2) If enough people are taking technical analysis seriously, and so are all staring at their charts to see when the 15 day SMA moves below the 50 day etc/whatever, then we're all waiting for the same moment, and such a moment would happen when it happens. If it didn't happen the previous day, then that's not when you would have made the move.

But I'm as firmly convinced as I think I can be that if you go all in on this type of strategy you're destined to underperform. So making that decision seems like clear folly. For me, then, the question is whether any of this can provide any reliable actionable insight for capturing excess returns, as opposed to being a complete system to adopt.
1) Yes, but if everybody knows what the "big guys" are up to, shouldn't the market adjust beforehand accordingly? Isn't this the same as the myth that stocks experience a price bump when they are added to a major index? In fact, the stocks experience a price bump before they are added to the index, because everybody knows they will be added. (at least that's what I have heard)

2) If people know that many other people are following such patterns, they will sell just before everybody else sells and buy just before everybody else buys.

I think it's fundamentally a game theory problem, as each participant is trying to outsmart/front-run the other participant.
Have you read the book “the man who solved the market” (Zuckerberg). The strategies discussed in this thread were explored by rentech and Bridgewater since the 80’s. From my interpretation of the book, Simons suggested that a large part of the returns they were generating were coming from retail - and not buy and hold Bogleheads (Simonds speculated “dentists” in the 90’s, in the 2020’s maybe Hedgefundies ?).

I think it is naive to think that technical analysis or the backtesting suggested here can generate alpha. What you are doing is 30 years behind the hedge funds. The only reason I can think of that this would generate a better than market return is the extra beta taken (through leverage) or luck.

I don’t see how doing the statistical analysis proposed or sticking it in portfolio visualiser has any hope of beating Rentech & others over time. It’s sort of overconfident, naive, maybe even delusional.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

dont_know_mind wrote: Sat Apr 17, 2021 4:38 am Have you read the book “the man who solved the market” (Zuckerberg). The strategies discussed in this thread were explored by rentech and Bridgewater since the 80’s. From my interpretation of the book, Simons suggested that a large part of the returns they were generating were coming from retail - and not buy and hold Bogleheads (Simonds speculated “dentists” in the 90’s, in the 2020’s maybe Hedgefundies ?).

I think it is naive to think that technical analysis or the backtesting suggested here can generate alpha. What you are doing is 30 years behind the hedge funds. The only reason I can think of that this would generate a better than market return is the extra beta taken (through leverage) or luck.

I don’t see how doing the statistical analysis proposed or sticking it in portfolio visualiser has any hope of beating Rentech & others over time. It’s sort of delusional. What do you think your edge is with the strategy you propose?
I agree that trying to beat the professionals, that are doing this full-time and with much more resources, is pointless.

By itself, these leveraged ETFs don't generate a higher return. Over long periods of time, they perform about the same as their unlevered index. While they give you 3x the (daily) beta, this extra volatility isn't rewarded by itself.

The only reason this works, in my opinion, is because it is combined with a leveraged, uncorrelated asset, and rebalanced from time to time. This creates a natural market-timing effect.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dont_know_mind »

tradri wrote: Sat Apr 17, 2021 5:03 am
dont_know_mind wrote: Sat Apr 17, 2021 4:38 am Have you read the book “the man who solved the market” (Zuckerberg). The strategies discussed in this thread were explored by rentech and Bridgewater since the 80’s. From my interpretation of the book, Simons suggested that a large part of the returns they were generating were coming from retail - and not buy and hold Bogleheads (Simonds speculated “dentists” in the 90’s, in the 2020’s maybe Hedgefundies ?).

I think it is naive to think that technical analysis or the backtesting suggested here can generate alpha. What you are doing is 30 years behind the hedge funds. The only reason I can think of that this would generate a better than market return is the extra beta taken (through leverage) or luck.

I don’t see how doing the statistical analysis proposed or sticking it in portfolio visualiser has any hope of beating Rentech & others over time. It’s sort of delusional. What do you think your edge is with the strategy you propose?
I agree that trying to beat the professionals, that are doing this full-time and with much more resources, is pointless.

By itself, these leveraged ETFs don't generate a higher return. Over long periods of time, they perform about the same as their unlevered index. While they give you 3x the (daily) beta, this extra volatility isn't rewarded by itself.

The only reason this works, in my opinion, is because it is combined with a leveraged, uncorrelated asset, and rebalanced from time to time. This creates a natural market-timing effect.
For an uncorrelated asset, at current interest rates that would appear to be cash. Other options would be a resource company index (Vale/BHP/other profitable miners). Or a country index with heavy resource tilt (UK, Canada, Australia). Gold, like oil has idiosyncratic risk. I could imagine situations where inflation and resource prices in general increase but gold does not (eg a central bank decides to sell its gold reserves). Similarly with oil or any one specific resource (eg oil if oil use has peaked).

I think my only edge as a retail investor is that I can employ leverage when institutions are forced to liquidate. The only time I take on leverage is when TSHTF and I spend the next 5-7 years paying that down.

I would not use the HFEA as:
A) too popular
B) having significant amount of net worth in black box, untested UPRO (in that it has not been through any systemic crisis where counterparty risk was stress tested) is to me nutty.

Cleanest application of leverage in my mind is to apply non-callable debt to a vanilla index fund. Then there are no moving parts other than a) index fund expense ratio, b) expected return of the index, c) cost of capital, d) exchange rate effects.

I think some non-US indexes were great value last year. I levered up 2:1 in April 20 and the carry was positive to the tune of 1% pa. I intend to pay the leverage off over the next 5-7 years. I don’t have any rebalancing hassles.

Like buying a chunk of real estate applying leverage in this way, the risks are obvious. If you buy when it is down 30% and it falls another 30%, you’re in the hole. But in another way the risk is controlled if you have a stable job and are youngish. If your leverage is 2-3X yearly income, bad case scenario, you end up paying the debt off over 5-7 years with nothing to show. Worst case scenario you can’t work and file for bankruptcy.

I like to think of leverage in a cashflow manner rather than the statistical one advocated in this thread. To me you are just leveraging your human capital based on your risk tolerance rather than finding some holy grail that works in all situations.

And yes, if you leverage you could lose! No way around that. The HFEA is not alchemy. The bond-stock correlation could kick you in the nuts. The whole triple levered long bonds (TMF) is to me like triple levering a pegged currency assuming it can’t break. I don’t do stuff that could kill me.

I favoured leveraging non US indexes with value and resources tilt last year precisely because it has not worked in the last 20 years and is unpopular. I would not be leveraging anything that is popular and the fact this is one of the most popular threads on bogleheads concerns me. As does the Bitcoin. I am allergic to both. Something being popular means to me the runway is probably not going to be long. I could be wrong. I figure I will still be ok with my investments if I am wrong as the imbedded expectations are low.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

dont_know_mind wrote: Sat Apr 17, 2021 6:33 am For an uncorrelated asset, at current interest rates that would appear to be cash. Other options would be a resource company index (Vale/BHP/other profitable miners). Or a country index with heavy resource tilt (UK, Canada, Australia). Gold, like oil has idiosyncratic risk. I could imagine situations where inflation and resource prices in general increase but gold does not (eg a central bank decides to sell its gold reserves). Similarly with oil or any one specific resource (eg oil if oil use has peaked).

I think my only edge as a retail investor is that I can employ leverage when institutions are forced to liquidate. The only time I take on leverage is when TSHTF and I spend the next 5-7 years paying that down.

I would not use the HFEA as:
A) too popular
B) having significant amount of net worth in black box, untested UPRO (in that it has not been through any systemic crisis where counterparty risk was stress tested) is to me nutty.

Cleanest application of leverage in my mind is to apply non-callable debt to a vanilla index fund. Then there are no moving parts other than a) index fund expense ratio, b) expected return of the index, c) cost of capital, d) exchange rate effects.

I think some non-US indexes were great value last year. I levered up 2:1 in April 20 and the carry was positive to the tune of 1% pa. I intend to pay the leverage off over the next 5-7 years. I don’t have any rebalancing hassles.

Like buying a chunk of real estate applying leverage in this way, the risks are obvious. If you buy when it is down 30% and it falls another 30%, you’re in the hole. But in another way the risk is controlled if you have a stable job and are youngish. If your leverage is 2-3X yearly income, bad case scenario, you end up paying the debt off over 5-7 years with nothing to show. Worst case scenario you can’t work and file for bankruptcy.

I like to think of leverage in a cashflow manner rather than the statistical one advocated in this thread. To me you are just leveraging your human capital based on your risk tolerance rather than finding some holy grail that works in all situations.

And yes, if you leverage you could lose! No way around that. The HFEA is not alchemy. The bond-stock correlation could kick you in the nuts. The whole triple levered long bonds (TMF) is to me like triple levering a pegged currency assuming it can’t break. I don’t do stuff that could kill me.

I favoured leveraging non US indexes with value and resources tilt last year precisely because it has not worked in the last 20 years and is unpopular. I would not be leveraging anything that is popular and the fact this is one of the most popular threads on bogleheads concerns me. As does the Bitcoin. I am allergic to both. Something being popular means to me the runway is probably not going to be long. I could be wrong. I figure I will still be ok with my investments if I am wrong as the imbedded expectations are low.
I don't know what the future will be, but so far treasuries have been less correlated to stocks than cash, miners, foreign stocks, gold and commodities.

I think taking out a loan directly just presents you with a different set of risks. You will have to worry about paying it back, and hence you can lose more than initially invested. While taking out a loan when the market hits rock bottom might seem smart, who is to say you won't lose your job and income in a true economic recession?

I don't see a reason why there should be a problem with the strategy if it gets too popular. As far as I'm aware, the leveraged ETFs don't have a bigger tracking error, just because more people are invested.

The funds could close down, but then you would just get liquidated at the last NAV calculation. (which would also suck at a market bottom, but at least you have the leveraged treasuries to balance things out a bit) Also, I don't see much counterparty risk with these products.

Personally, I feel more comfortable investing in a leveraged strategy where I I know that a) I can't lose more than I invested and b) I can't face a total loss. In that regard, the daily releveraging of these ETFs present a clear advantage.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by corp_sharecropper »

tradri wrote: Sat Apr 17, 2021 6:59 am
dont_know_mind wrote: Sat Apr 17, 2021 6:33 am For an uncorrelated asset, at current interest rates that would appear to be cash. Other options would be a resource company index (Vale/BHP/other profitable miners). Or a country index with heavy resource tilt (UK, Canada, Australia). Gold, like oil has idiosyncratic risk. I could imagine situations where inflation and resource prices in general increase but gold does not (eg a central bank decides to sell its gold reserves). Similarly with oil or any one specific resource (eg oil if oil use has peaked).

I think my only edge as a retail investor is that I can employ leverage when institutions are forced to liquidate. The only time I take on leverage is when TSHTF and I spend the next 5-7 years paying that down.

I would not use the HFEA as:
A) too popular
B) having significant amount of net worth in black box, untested UPRO (in that it has not been through any systemic crisis where counterparty risk was stress tested) is to me nutty.

Cleanest application of leverage in my mind is to apply non-callable debt to a vanilla index fund. Then there are no moving parts other than a) index fund expense ratio, b) expected return of the index, c) cost of capital, d) exchange rate effects.

I think some non-US indexes were great value last year. I levered up 2:1 in April 20 and the carry was positive to the tune of 1% pa. I intend to pay the leverage off over the next 5-7 years. I don’t have any rebalancing hassles.

Like buying a chunk of real estate applying leverage in this way, the risks are obvious. If you buy when it is down 30% and it falls another 30%, you’re in the hole. But in another way the risk is controlled if you have a stable job and are youngish. If your leverage is 2-3X yearly income, bad case scenario, you end up paying the debt off over 5-7 years with nothing to show. Worst case scenario you can’t work and file for bankruptcy.

I like to think of leverage in a cashflow manner rather than the statistical one advocated in this thread. To me you are just leveraging your human capital based on your risk tolerance rather than finding some holy grail that works in all situations.

And yes, if you leverage you could lose! No way around that. The HFEA is not alchemy. The bond-stock correlation could kick you in the nuts. The whole triple levered long bonds (TMF) is to me like triple levering a pegged currency assuming it can’t break. I don’t do stuff that could kill me.

I favoured leveraging non US indexes with value and resources tilt last year precisely because it has not worked in the last 20 years and is unpopular. I would not be leveraging anything that is popular and the fact this is one of the most popular threads on bogleheads concerns me. As does the Bitcoin. I am allergic to both. Something being popular means to me the runway is probably not going to be long. I could be wrong. I figure I will still be ok with my investments if I am wrong as the imbedded expectations are low.
I don't know what the future will be, but so far treasuries have been less correlated to stocks than cash, miners, foreign stocks, gold and commodities.

I think taking out a loan directly just presents you with a different set of risks. You will have to worry about paying it back, and hence you can lose more than initially invested. While taking out a loan when the market hits rock bottom might seem smart, who is to say you won't lose your job and income in a true economic recession?

I don't see a reason why there should be a problem with the strategy if it gets too popular. As far as I'm aware, the leveraged ETFs don't have a bigger tracking error, just because more people are invested.

The funds could close down, but then you would just get liquidated at the last NAV calculation. (which would also suck at a market bottom, but at least you have the leveraged treasuries to balance things out a bit) Also, I don't see much counterparty risk with these products.

Personally, I feel more comfortable investing in a leveraged strategy where I I know that a) I can't lose more than I invested and b) I can't face a total loss. In that regard, the daily releveraging of these ETFs present a clear advantage.

I'm in the camp that thinks bogleheads, in general, have an irrationally high aversion to margin/callable/leverage as applied within reason to a diversified portfolio and very active imaginations as to how much "work" it is to manage. If you spend enough time thinking about it one can get over it. AQR has an amusing publication about irrational aversion to leverage that's also worth a read.

You just can't get more convenient and cheap leverage than what is possible with margin/futures/box spreads/options, just have to learn to live with the idea that, yes, it's theoretically callable.

ETA: I just checked, and by my calculations I'm paying an effective rate of <1% on my leverage (achieved through a mix of margin, futures, and options)
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

corp_sharecropper wrote: Sat Apr 17, 2021 8:04 am
I'm in the camp that thinks bogleheads, in general, have an irrationally high aversion to margin/callable/leverage as applied within reason to a diversified portfolio and very active imaginations as to how much "work" it is to manage. If you spend enough time thinking about it one can get over it. AQR has an amusing publication about irrational aversion to leverage that's also worth a read.

You just can't get more convenient and cheap leverage than what is possible with margin/futures/box spreads/options, just have to learn to live with the idea that, yes, it's theoretically callable.

ETA: I just checked, and by my calculations I'm paying an effective rate of <1% on my leverage (achieved through a mix of margin, futures, and options)
Can you please walk me through why margin, options and futures are a better way to achieve leverage than leveraged ETFs?

By using margin, one is essentially borrowing at an interest rate that is significantly higher than the overnight rate. Why should that be more effective than using embedded leverage?

With options you also pay an embedded interest rate that is higher than the overnight rate. Futures are better in this regard, but they are only sold in big chunks, as far as I know, so starting out and rebalancing is going to be difficult.

Also, futures and margin can be "margin called". (Total loss with options) Therefore, I think even at a 2x leverage the risk of facing a total loss event is substantially higher than zero. So, you also have to implement some sort of re-leveraging strategy, which will inevitably introduce volatility decay.

I just don't see the benefit of doing this directly, rather than going with the convenience and safety of daily releveraged ETFs.
dont_know_mind
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dont_know_mind »

...taking out a loan directly just presents you with a different set of risks. You will have to worry about paying it back, and hence you can lose more than initially invested. While taking out a loan when the market hits rock bottom might seem smart, who is to say you won't lose your job and income in a true economic recession?

I don't see a reason why there should be a problem with the strategy if it gets too popular. As far as I'm aware, the leveraged ETFs don't have a bigger tracking error, just because more people are invested.
[/quote]

I guess it depends on what you’re comfortable with. I am comfortable with non-callable debt. It is slightly more expensive than margin/futures but cheaper than a LETF.

Would you have difficulty buying real estate during a recession also?

I guess with any levered asset, it should not depend on your job at the end of the day, but could. I guess with the real estate and levered index you buy, hopefully the dividend/rental yield covers the interest. If it doesn’t you have to fall back on your wage income to cover.

It is a problem with index popularity. US indexes which have performed well in the last decade have low dividend yields. So unless dividends increase, if your capital returns are not there you will lose. But that will happen with UPRO or any levered SP500 position. That is what I meant by popularity problem.

The popularity of this LETF/HFEA thread is a contrarian indicator in itself.

People have said this doesn’t matter. They also said that leveraging into TMF when 20 year treasuries were yielding 1% was not a problem. I tend to think it will be, but who knows. It’s not something that I see as an attractive proposition.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
dont_know_mind
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dont_know_mind »

tradri wrote: Sat Apr 17, 2021 8:22 am
corp_sharecropper wrote: Sat Apr 17, 2021 8:04 am
I'm in the camp that thinks bogleheads, in general, have an irrationally high aversion to margin/callable/leverage as applied within reason to a diversified portfolio and very active imaginations as to how much "work" it is to manage. If you spend enough time thinking about it one can get over it. AQR has an amusing publication about irrational aversion to leverage that's also worth a read.

You just can't get more convenient and cheap leverage than what is possible with margin/futures/box spreads/options, just have to learn to live with the idea that, yes, it's theoretically callable.

ETA: I just checked, and by my calculations I'm paying an effective rate of <1% on my leverage (achieved through a mix of margin, futures, and options)
Can you please walk me through why margin, options and futures are a better way to achieve leverage than leveraged ETFs?

By using margin, one is essentially borrowing at an interest rate that is significantly higher than the overnight rate. Why should that be more effective than using embedded leverage?

With options you also pay an embedded interest rate that is higher than the overnight rate. Futures are better in this regard, but they are only sold in big chunks, as far as I know, so starting out and rebalancing is going to be difficult.

Also, futures and margin can be "margin called". (Total loss with options) Therefore, I think even at a 2x leverage the risk of facing a total loss event is substantially higher than zero. So, you also have to implement some sort of re-leveraging strategy, which will inevitably introduce volatility decay.

I just don't see the benefit of doing this directly, rather than going with the convenience and safety of daily releveraged ETFs.
I am in the process of replacing non-callable debt with margin backed by non-callable debt/bank line of credit.

I think this is cheaper than the LETF by around 0.75% pa. The margin rates I can get are probably not more than 0.25% more than what UPRO pays.

The main thing though is that I do not need daily rebalancing. In fact I don’t need any rebalancing. I have my target leverage amount already and ideally would keep it at that dollar amount. I am happy to have leverage ratio fall over time going forward.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
tradri
Posts: 606
Joined: Tue Mar 23, 2021 5:42 pm

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

Post by tradri »

dont_know_mind wrote: Sat Apr 17, 2021 9:04 am
I am in the process of replacing non-callable debt with margin backed by non-callable debt/bank line of credit.

I think this is cheaper than the LETF by around 0.75% pa. The margin rates I can get are probably not more than 0.25% more than what UPRO pays.

The main thing though is that I do not need daily rebalancing. In fact I don’t need any rebalancing. I have my target leverage amount already and ideally would keep it at that dollar amount. I am happy to have leverage ratio fall over time going forward.
What's the leverage ratio you are aiming at with this loan and what interest rate do you pay on that per year?

If it truly is non-callable, then you really don't need to worry about releveraging down in a market crash. But I am really curious what the interest rate on that is, since it does seem too good to be true.
dont_know_mind
Posts: 94
Joined: Sun Nov 22, 2020 7:14 am

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

Post by dont_know_mind »

tradri wrote: Sat Apr 17, 2021 9:11 am
dont_know_mind wrote: Sat Apr 17, 2021 9:04 am
I am in the process of replacing non-callable debt with margin backed by non-callable debt/bank line of credit.

I think this is cheaper than the LETF by around 0.75% pa. The margin rates I can get are probably not more than 0.25% more than what UPRO pays.

The main thing though is that I do not need daily rebalancing. In fact I don’t need any rebalancing. I have my target leverage amount already and ideally would keep it at that dollar amount. I am happy to have leverage ratio fall over time going forward.
What's the leverage ratio you are aiming at with this loan and what interest rate do you pay on that per year?

If it truly is non-callable, then you really don't need to worry about releveraging down in a market crash. But I am really curious what the interest rate on that is, since it does seem too good to be true.
I'm paying 1.8% on non-callable debt currently, fixed for 2 years.
I was thinking of getting a margin loan at around 50% LTV and the rate on that would be around 0.75%.
I am not sure about how reliable the bank line of credit would be in severe crisis though, so I'm not sure if the lower margin rate would be worth the risk of margin call.
I've had this on my to-do list for a few months now. As the dividends in the indexes I have are paying 3-4%, and the cost of capital is half that, I haven't had a great rush to look at the lower rate margin option. But I probably will be more motivated if rates rise.
My ramblings are probably rubbish, biased by my position and talking my own book. No-one should invest based on my views. Some days I wonder whether I've had some skill or just been a lucky gambler.
tradri
Posts: 606
Joined: Tue Mar 23, 2021 5:42 pm

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

Post by tradri »

dont_know_mind wrote: Sat Apr 17, 2021 10:17 am I'm paying 1.8% on non-callable debt currently, fixed for 2 years.
I was thinking of getting a margin loan at around 50% LTV and the rate on that would be around 0.75%.
I am not sure about how reliable the bank line of credit would be in severe crisis though, so I'm not sure if the lower margin rate would be worth the risk of margin call.
I've had this on my to-do list for a few months now. As the dividends in the indexes I have are paying 3-4%, and the cost of capital is half that, I haven't had a great rush to look at the lower rate margin option. But I probably will be more motivated if rates rise.
Ok.

Even at 1.5x direct leverage on the stock market, the returns are less than what a 70/30 UPRO/TMF backtest shows. (assuming you are after the highest returns)
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