HEDGEFUNDIE's excellent adventure Part II: The next journey

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MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Mon Aug 12, 2019 11:25 pm

MoneyMarathon wrote:
Mon Aug 12, 2019 11:16 pm
privatefarmer wrote:
Mon Aug 12, 2019 10:54 pm
4.5x total leverage using a combo of LETFs and margin loan from IB
Might be time to take some winnings off the table (i.e., cut down on margin)? If this says what it looks like it says, your ETFs are at IB and they can start selling your assets at any time if your equity in the account (the part you own - beyond the money loaned to you by IB) doesn't meet their minimum requirements. Even under relatively favorable historical conditions for a bear market, like 2000-2003 and 2008, there were some drawdowns for a UPRO/TMF combo that could trigger margin calls.

What's the big hurry? Beyond a certain point of leverage and with a certain amount of time in the market, a more stable and less-levered portfolio will always win (not just deliver smaller swings - deliver more performance), with what most people could just go ahead and call total and complete certainty... you need to break out several decimal places to get the odds of it not happening. :|
I seem to recall the optimum leverage amount was in the realm of 2 for most markets historically, and the last 3-4 decades for US markets it was ironically 3x. Good luck to your privatefarmer, if you made $26K today you must have a significant allocation to this, around $1.3M including the margin loan?

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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Mon Aug 12, 2019 11:31 pm

MoneyMarathon wrote:
Mon Aug 12, 2019 11:16 pm
privatefarmer wrote:
Mon Aug 12, 2019 10:54 pm
4.5x total leverage using a combo of LETFs and margin loan from IB
Might be time to take some winnings off the table (i.e., cut down on margin)? If this says what it looks like it says, your ETFs are at IB and they can start selling your assets at any time if your equity in the account (the part you own - beyond the money loaned to you by IB) doesn't meet their minimum requirements. Even under relatively favorable historical conditions for a bear market, like 2000-2003 and 2008, there were some drawdowns for a UPRO/TMF combo that could trigger margin calls.

What's the big hurry? Beyond a certain point of leverage and with a certain amount of time in the market, a more stable and less-levered portfolio will always win (not just deliver smaller swings - deliver more performance), with what most people could just go ahead and call total and complete certainty... you need to break out several decimal places to get the odds of it not happening. :|
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).

I plan to reduce my risk as my portfolio grows. I’m probably about 5 years out from FI at which point I would most likely continue the risk parity approach but maybe with only 2x leverage.

MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Mon Aug 12, 2019 11:34 pm

privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
MoneyMarathon wrote:
Mon Aug 12, 2019 11:16 pm
privatefarmer wrote:
Mon Aug 12, 2019 10:54 pm
4.5x total leverage using a combo of LETFs and margin loan from IB
Might be time to take some winnings off the table (i.e., cut down on margin)? If this says what it looks like it says, your ETFs are at IB and they can start selling your assets at any time if your equity in the account (the part you own - beyond the money loaned to you by IB) doesn't meet their minimum requirements. Even under relatively favorable historical conditions for a bear market, like 2000-2003 and 2008, there were some drawdowns for a UPRO/TMF combo that could trigger margin calls.

What's the big hurry? Beyond a certain point of leverage and with a certain amount of time in the market, a more stable and less-levered portfolio will always win (not just deliver smaller swings - deliver more performance), with what most people could just go ahead and call total and complete certainty... you need to break out several decimal places to get the odds of it not happening. :|
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).

I plan to reduce my risk as my portfolio grows. I’m probably about 5 years out from FI at which point I would most likely continue the risk parity approach but maybe with only 2x leverage.
What rate of return will it take to hit FI 5 years out? I imagine a 60-70% drawdown would hurt your chances, let alone whether that is truly the floor for you.

HawkeyePierce
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HawkeyePierce » Mon Aug 12, 2019 11:38 pm

MotoTrojan wrote:
Mon Aug 12, 2019 11:18 pm
MoneyMarathon wrote:
Mon Aug 12, 2019 10:45 pm
drock wrote:
Mon Aug 12, 2019 10:04 pm
If we're worried about bond rates and duration and accepting that we're not going to make as much on your bond positions going forward, would revisiting using TYD over TMF have any merit?
EDV (extended duration treasuries) tends to outperform TYD (3x intermediate) slightly when yields are flat or increasing, apparently due to the Cost Matters Hypothesis (lower expense ratio). TYD might have a small edge when yields are falling (but not much). EDV has a much smaller bid-ask spread (lower trading costs) and lower tracking error... which seems to tip the scales definitively over to EDV (any time a Vanguard ETF can play a similar role as a Direxion ETF, prefer Vanguard IMO).
Correct. Furthermore, my backtesting suggests that there is no significant difference between how you get your weighted-duration exposure, so the real question is what weighted-duration you want. Using TYD at the same allocation as you would've used TMF will simply reduce your duration exposure; yes it will cause less of a drag/loss during rising rate periods, but it also will have less protection during an equity crisis, and less rebalancing bonus when correlations are negative; not that it is a bad move, just a bad way to implement it. There may be some merit to going ultra-short with mega leverage (like the individuals using 2-year treasury futures) but my backtesting only looked at ETFs that may be used in a manner similar to the OG strategy.

As noted, there really is (in my humble opinion) no use for TYD since you can replicate any use of it with a combo of TMF & a lower duration fund such as IEF, TLT, and/or EDV, reducing your overall exposure to borrowing costs and high expense ratios. By using TYD you are simply increasing the amount of high-cost leveraged funds you need to hold to get your desired duration exposure.

In general EDV is a very interesting fund as it gets pretty good duration exposure (about 1/2 the effectiveness as TMF) with no leverage costs or high expenses. ~40/60 UPRO/EDV is a pretty balanced risk profile, but I am greedy :twisted:.
Pardon if this has been covered before, but is there a good model for EDV like we have for UPRO and TMF, given that the fund is only 11 years old?

Curious to see what it looks like in PV. I'll admit I'm tempted to swap TMF for EDV given the lower cost. 85 fewer basis points in performance for TMF to overcome.

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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Mon Aug 12, 2019 11:39 pm

MotoTrojan wrote:
Mon Aug 12, 2019 11:34 pm
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
MoneyMarathon wrote:
Mon Aug 12, 2019 11:16 pm
privatefarmer wrote:
Mon Aug 12, 2019 10:54 pm
4.5x total leverage using a combo of LETFs and margin loan from IB
Might be time to take some winnings off the table (i.e., cut down on margin)? If this says what it looks like it says, your ETFs are at IB and they can start selling your assets at any time if your equity in the account (the part you own - beyond the money loaned to you by IB) doesn't meet their minimum requirements. Even under relatively favorable historical conditions for a bear market, like 2000-2003 and 2008, there were some drawdowns for a UPRO/TMF combo that could trigger margin calls.

What's the big hurry? Beyond a certain point of leverage and with a certain amount of time in the market, a more stable and less-levered portfolio will always win (not just deliver smaller swings - deliver more performance), with what most people could just go ahead and call total and complete certainty... you need to break out several decimal places to get the odds of it not happening. :|
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).

I plan to reduce my risk as my portfolio grows. I’m probably about 5 years out from FI at which point I would most likely continue the risk parity approach but maybe with only 2x leverage.
What rate of return will it take to hit FI 5 years out? I imagine a 60-70% drawdown would hurt your chances, let alone whether that is truly the floor for you.
It’d take only about a 10% CAGR. This strategy would’ve given a whopping 27% CAGR after taxes and borrowing costs over the last 33 years... so I guess my projections are on the “conservative” side. A 60-70% DD would obviously change that but that’s the risk. I’m in my mid 30s, i fully intend to be employed until I have a stroke so this is more for peace of mind above anything else.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Mon Aug 12, 2019 11:44 pm

sfmurph wrote:
Mon Aug 12, 2019 9:07 pm
Another concern with the 45/55 is with MoneyMarathon’s 45/55 CASHZERO/UPRO simulation that shows that 55% UPRO with 45% flat is that you get the returns of the US stock market amplified by another position (TMF). But if the hesitation is that TMF will provide a negative return, why not get the US stock market return in a simpler fashion?
There's nothing wrong with getting the US stock market return in simpler fashion, but this is the idea...

If yields are flat:
If so, TMF has an expected positive return. Historically there's been about a 0.5% CAGR "rebalancing bonus" from negative correlation with UPRO. And there's also the return on the bonds held outright inside TMF, plus the spread between the short term borrowing rate and the long term, minus the expense ratio. All told, it seems like you might get 4% CAGR higher than the S&P 500 if yields are flat, with 55% UPRO / 45% TMF.

Rising yields:
The strategy has specific beliefs about rising yields. That belief is that they tend to occur when the market (UPRO) is doing well. Recently, this idea has held up (further back, not as much - in the future, who knows?). If you're not sure about that continuing to be true, this might not be the strategy for you. One way to deal with uncertainty about unexpected inflation or rising yields is to make a little room for 10% gold, a third asset without historical correlation to the other two.

Falling yields:
The "make out like bandits" or "make up for the falling stock market" scenario.

Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Mon Aug 12, 2019 11:55 pm

MoneyMarathon wrote:
Mon Aug 12, 2019 11:44 pm
Rising yields:
The strategy has specific beliefs about rising yields. That belief is that they tend to occur when the market (UPRO) is doing well. Recently, this idea has held up (further back, not as much - in the future, who knows?). If you're not sure about that continuing to be true, this might not be the strategy for you. One way to deal with uncertainty about unexpected inflation or rising yields is to make a little room for 10% gold, a third asset without historical correlation to the other two.
At least rising yields are a bit easier to spot and predict than equities. If one feels like rates may start rising, we can swap out the TMF for some other long term bond fund or a total bond market fund.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 12:24 am

Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?

Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 12:29 am

MoneyMarathon wrote:
Tue Aug 13, 2019 12:24 am
Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?
The Fed will start signalling the rate increases. It's not perfect, nothing is. But if one is risk averse, we can de-lever from TMF into EDV. The biggest issue I have with TMF isn't the leverage per se but the extreme costs from interest, management, & even "volatility decay". As such, extreme gains are needed to offset the additional costs of owning the asset.

That's how I see it anyway.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 12:32 am

privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).
market timer: "If you choose to adopt this strategy, have contingency plans in place ahead of time and follow your plan. You don't want to be a deer in headlights, making decisions lacking sleep in the middle of night, as I was. One of the key lessons I learned is that bad decisions tend to beget more bad decisions. Try to make decisions with a sound mind."
- https://forum.mrmoneymustache.com/inves ... verage/50/
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
where they allow me to borrow up to $4 for every $1 I have invested
Where do the portfolio margin rules at IB say that you may have only $1 in for every $4 borrowed, without getting positions liquidated?

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 12:37 am

Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:24 am
Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?
The Fed will start signalling the rate increases. It's not perfect, nothing is.
When the Fed signals rate increases and someone gets out of TMF, when does someone get back in?
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
But if one is risk averse, we can de-lever from TMF into EDV. The biggest issue I have with TMF isn't the leverage per se but the extreme costs from interest, management, & even "volatility decay". As such, extreme gains are needed to offset the additional costs of owning the asset.
It's certainly reasonable to avoid all the drawbacks of TMF, but I'm not sure it's easy to time getting in and out of it.

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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Tue Aug 13, 2019 12:46 am

MoneyMarathon wrote:
Tue Aug 13, 2019 12:32 am
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).
market timer: "If you choose to adopt this strategy, have contingency plans in place ahead of time and follow your plan. You don't want to be a deer in headlights, making decisions lacking sleep in the middle of night, as I was. One of the key lessons I learned is that bad decisions tend to beget more bad decisions. Try to make decisions with a sound mind."
- https://forum.mrmoneymustache.com/inves ... verage/50/
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
where they allow me to borrow up to $4 for every $1 I have invested
Where do the portfolio margin rules at IB say that you may have only $1 in for every $4 borrowed, without getting positions liquidated?
They calculate margin requirements based on the volatility of overall portfolio. Right now, they would allow me to borrow $4 for every $1, that could change. It’s a risk. But, again, all I have to do is move non leveraged ETFS to leveraged ETFs and reduce my margin loan. Right now, 65% of my portfolio is in UNleveraged ETFs that could be converted to 3x LETFs if need be.

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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Tue Aug 13, 2019 12:48 am

MoneyMarathon wrote:
Tue Aug 13, 2019 12:37 am
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:24 am
Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?
The Fed will start signalling the rate increases. It's not perfect, nothing is.
When the Fed signals rate increases and someone gets out of TMF, when does someone get back in?
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
But if one is risk averse, we can de-lever from TMF into EDV. The biggest issue I have with TMF isn't the leverage per se but the extreme costs from interest, management, & even "volatility decay". As such, extreme gains are needed to offset the additional costs of owning the asset.
It's certainly reasonable to avoid all the drawbacks of TMF, but I'm not sure it's easy to time getting in and out of it.
Wouldn’t the market already have fed actions priced into LTT yields? I don’t think you’d be able to “time” yield movements any better than you could time the stock market?

Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 12:50 am

MoneyMarathon wrote:
Tue Aug 13, 2019 12:37 am
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:24 am
Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?
The Fed will start signalling the rate increases. It's not perfect, nothing is.
When the Fed signals rate increases and someone gets out of TMF, when does someone get back in?
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
But if one is risk averse, we can de-lever from TMF into EDV. The biggest issue I have with TMF isn't the leverage per se but the extreme costs from interest, management, & even "volatility decay". As such, extreme gains are needed to offset the additional costs of owning the asset.
It's certainly reasonable to avoid all the drawbacks of TMF, but I'm not sure it's easy to time getting in and out of it.
I figure you get back in when markets start expecting a rate cut to come. Let the smarter bomd traders signal for me. I'll be behind, but that's okay. I'd rather err on the side of less risk.

Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 12:52 am

privatefarmer wrote:
Tue Aug 13, 2019 12:46 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:32 am
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).
market timer: "If you choose to adopt this strategy, have contingency plans in place ahead of time and follow your plan. You don't want to be a deer in headlights, making decisions lacking sleep in the middle of night, as I was. One of the key lessons I learned is that bad decisions tend to beget more bad decisions. Try to make decisions with a sound mind."
- https://forum.mrmoneymustache.com/inves ... verage/50/
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
where they allow me to borrow up to $4 for every $1 I have invested
Where do the portfolio margin rules at IB say that you may have only $1 in for every $4 borrowed, without getting positions liquidated?
They calculate margin requirements based on the volatility of overall portfolio. Right now, they would allow me to borrow $4 for every $1, that could change. It’s a risk. But, again, all I have to do is move non leveraged ETFS to leveraged ETFs and reduce my margin loan. Right now, 65% of my portfolio is in UNleveraged ETFs that could be converted to 3x LETFs if need be.
I thought the sec limits margin to 50%?

Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 12:52 am

privatefarmer wrote:
Tue Aug 13, 2019 12:48 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:37 am
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:24 am
Lee_WSP wrote:
Mon Aug 12, 2019 11:55 pm
At least rising yields are a bit easier to spot and predict than equities.
IDK. Any given inflation scare or run-up in yields could turn out to be short-lived. It's one thing to predict, another to be right. Which increment in yields is the one that signals long term rising yields? 3% to 4%? 4% to 5%? Or what is it that makes it easy to predict?
The Fed will start signalling the rate increases. It's not perfect, nothing is.
When the Fed signals rate increases and someone gets out of TMF, when does someone get back in?
Lee_WSP wrote:
Tue Aug 13, 2019 12:29 am
But if one is risk averse, we can de-lever from TMF into EDV. The biggest issue I have with TMF isn't the leverage per se but the extreme costs from interest, management, & even "volatility decay". As such, extreme gains are needed to offset the additional costs of owning the asset.
It's certainly reasonable to avoid all the drawbacks of TMF, but I'm not sure it's easy to time getting in and out of it.
Wouldn’t the market already have fed actions priced into LTT yields? I don’t think you’d be able to “time” yield movements any better than you could time the stock market?
Yes, but the goal is to avoid further unnecessary leveraged exposure, not predict the market. I know i cannot predict the market.

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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Tue Aug 13, 2019 1:03 am

Lee_WSP wrote:
Tue Aug 13, 2019 12:52 am
privatefarmer wrote:
Tue Aug 13, 2019 12:46 am
MoneyMarathon wrote:
Tue Aug 13, 2019 12:32 am
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
So I’m fine with a targeted max DD of 60-70%. I was 100% global SCV before this thread. Since 1987, the 20day risk parity strategy using s/p500/LTTs would've had a max DD of 12%, thus a 4.5x leveraged strategy would’ve fallen 54%. I’m in IBs “portfolio margin” setup where they allow me to borrow up to $4 for every $1 I have invested. Because of LETFs, I am easily able to stay within that margin requirement while maintaining an overall 4.5x leveraged portfolio (if I’m close to a margin call I simply swap out unleveraged ETFs for LETFs and reduce my margin with IB).
market timer: "If you choose to adopt this strategy, have contingency plans in place ahead of time and follow your plan. You don't want to be a deer in headlights, making decisions lacking sleep in the middle of night, as I was. One of the key lessons I learned is that bad decisions tend to beget more bad decisions. Try to make decisions with a sound mind."
- https://forum.mrmoneymustache.com/inves ... verage/50/
privatefarmer wrote:
Mon Aug 12, 2019 11:31 pm
where they allow me to borrow up to $4 for every $1 I have invested
Where do the portfolio margin rules at IB say that you may have only $1 in for every $4 borrowed, without getting positions liquidated?
They calculate margin requirements based on the volatility of overall portfolio. Right now, they would allow me to borrow $4 for every $1, that could change. It’s a risk. But, again, all I have to do is move non leveraged ETFS to leveraged ETFs and reduce my margin loan. Right now, 65% of my portfolio is in UNleveraged ETFs that could be converted to 3x LETFs if need be.
I thought the sec limits margin to 50%?
For Reg t margin accounts they do. IB allows you to borrow more if your acct is >$100k. I am currently borrowing $1.3mil and only have $300k of my own money in it.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 1:12 am

I’ve chamged my allocation several times since the beginning of this thread and, news flash, I’m doing this with 100% of my portfolio. I believe in buy and hold but I also believe that as more evidence comes in you’d be foolish not to adjust. Thanks to HEDGEFUNDIE, I’ve discovered risk parity, read several books on it now, and am fully bought in. I currently am employing the 20day risk parity look back strategy with a targeted 4.5x total leverage using a combo of LETFs and margin loan from IB.
privatefarmer wrote:
Tue Aug 13, 2019 12:46 am
Right now, 65% of my portfolio is in UNleveraged ETFs that could be converted to 3x LETFs if need be.
I am currently borrowing $1.3mil and only have $300k of my own money in it.
What's in the 65% of the portfolio?

How much could the total portfolio drop before you'd have to deleverage?

How much could it drop (percentage) before you'd have no equity to deleverage with? Looks like a -18.75% drop (of your portfolio - including 35% LETFs - not of the underlying, which could move less) is game over. The whole $300k equity would be gone and IB would claw back their loan.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by rascott » Tue Aug 13, 2019 1:16 am

Lee_WSP wrote:
Mon Aug 12, 2019 7:15 pm
I hope that those of us employing this strategy are only risking a small portion of our assets. However, the other side of the coin is that even a 60/40 portfolio comes with risk.

There's also the risk of not having enough to retire. That's a risk whose medicine is to increase the savings rate, but what if we've got no more expenses to cut?
I think most here are in the conservative range with this. At least I hope.

I don't see a situation where this does markedly worse than the market, unless you see a major chage in monetary policy. And that impact would be a slow moving train that you would hopefully see.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Tue Aug 13, 2019 1:22 am

MoneyMarathon wrote:
Tue Aug 13, 2019 1:12 am
I’ve chamged my allocation several times since the beginning of this thread and, news flash, I’m doing this with 100% of my portfolio. I believe in buy and hold but I also believe that as more evidence comes in you’d be foolish not to adjust. Thanks to HEDGEFUNDIE, I’ve discovered risk parity, read several books on it now, and am fully bought in. I currently am employing the 20day risk parity look back strategy with a targeted 4.5x total leverage using a combo of LETFs and margin loan from IB.
privatefarmer wrote:
Tue Aug 13, 2019 12:46 am
Right now, 65% of my portfolio is in UNleveraged ETFs that could be converted to 3x LETFs if need be.
I am currently borrowing $1.3mil and only have $300k of my own money in it.
What's in the 65% of the portfolio?

How much could the total portfolio drop before you'd have to deleverage?

How much could it drop (percentage) before you'd have no equity to deleverage with? Looks like a -18.75% one day drop (of your portfolio - including 35% LETFs - not of the underlying, which could move less) is game over. The whole $300k equity would be gone and IB would claw back their loan.
So I also have two Roth IRAs and a couple 401ks that I’m including. The 65% is made up of VOO and VGLT (unleveraged equities/LTTs). 5% is what’s in my 401ks (unleveraged mutual funds) The rest (30%) is 3x LETFs. I can withstand up to a 6% 1-day drop of my portfolio as of now before hitting a margin call. So I think there’s a lot of misunderstanding of how margin calls work. #1 it’s extremely unlikely my portfolio would drop 6% in a single day. But #2 if it did happen, IB would only sell enough securities to get me within their leverage requirements, they would not liquidate everything rather only a small percentage. I pay attention to my portfolio on a daily basis, if I saw I was within even 1% of a margin call I would simply sell off a bunch of unleveraged ETFs in my brokerage acct and move them to 3x LETFs either in my brokerage acct or my Roth IRAs. If I wanted to be more passive, I could give myself a bigger cushion/use less margin and more LETFs but margin would allow for less volatility drag vs LETFs so I prefer margin.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Tue Aug 13, 2019 1:27 am

Yes, a ~20% 1-day drop would basically kill my portfolio. However, as of today I am 40/60 equities/LTTs. This strategy made it through even black Monday with only a minor drawdown. The worst DD over the last 33yrs was during the GFC and it was 12% over the course of 2 months.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Tue Aug 13, 2019 3:10 am

stipeman wrote:
Sat Aug 10, 2019 12:24 am
MotoTrojan wrote:
Fri Aug 09, 2019 11:27 pm
stipeman wrote:
Fri Aug 09, 2019 11:06 pm
rascott wrote:
Thu Aug 08, 2019 8:40 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 8:36 pm


It's a shame PIMCO chose the obviously inferior small cap index, I guess they are a bond shop after all.

Agreed....but don't think they have an option.... believe you can only buy futures on the Russell. So blame CME for not giving us a better product :D

Just found it odd that the bonds bosted returns so much over the index of that fund....but not the original Stocks Plus fund. Would assume they used the same bond strategy with both, guess not.
Explained in this link:
https://www.pimco.com/en-us/insights/in ... 02299831=1
Wow, this is worth a further look. May be worth considering this fund in place of the S&P500 based ones.

In a nutshell the R2K is much more illiquid and it is more difficult to short individual stocks; this premium paid by those shorting results in futures (borrowing) costs that are usually below libor, boosting the potential outperformance of the bond-picking. Need to dig more into the bond strategy used itself but seems intriguing.

On second thought it looks like the S&P600 gets similar returns and is much more efficient... perhaps I am better off holding S&P600 value, as I already do.
If you want a 100/100 type fund and like small value you can also consider PCFIX.
I'm a bit confused how they get the multifactor exposure. I looked at the schedule of portfolio holdings, but didn't understand it. It's full of currency futures, often in both directions with different settlement dates. To my knowledge there are no futures on multifactor small caps indexes. The whole fun costs 0.84% ER (without interest cost).

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Tue Aug 13, 2019 3:14 am

MotoTrojan wrote:
Fri Aug 09, 2019 11:27 pm
stipeman wrote:
Fri Aug 09, 2019 11:06 pm
rascott wrote:
Thu Aug 08, 2019 8:40 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 8:36 pm
rascott wrote:
Thu Aug 08, 2019 8:34 pm



I was comparing it to the Russell...since that's what it tracks.

https://www.portfoliovisualizer.com/bac ... total3=100
It's a shame PIMCO chose the obviously inferior small cap index, I guess they are a bond shop after all.

Agreed....but don't think they have an option.... believe you can only buy futures on the Russell. So blame CME for not giving us a better product :D

Just found it odd that the bonds bosted returns so much over the index of that fund....but not the original Stocks Plus fund. Would assume they used the same bond strategy with both, guess not.
Explained in this link:
https://www.pimco.com/en-us/insights/in ... 02299831=1
Wow, this is worth a further look. May be worth considering this fund in place of the S&P500 based ones.

In a nutshell the R2K is much more illiquid and it is more difficult to short individual stocks; this premium paid by those shorting results in futures (borrowing) costs that are usually below libor, boosting the potential outperformance of the bond-picking. Need to dig more into the bond strategy used itself but seems intriguing.

On second thought it looks like the S&P600 gets similar returns and is much more efficient... perhaps I am better off holding S&P600 value, as I already do.
I read the linked page. In my opinion, it's just a very long and complicated way of saying that when you hold the futures, you indirectly get some benefit of stock lending fees, that you would otherwise also get to some extent with direct exposure via individual stocks (for example at Interactive Brokers) or with most ETFs (lending income). So it's not really an additional source of return inherent in the futures, and I wouldn't see it as a reduction in effective borrowing cost vs. Libor, but add it to the opportunity cost inherent in the index investment.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by columbia » Tue Aug 13, 2019 3:58 am

MoneyMarathon wrote:
Mon Aug 12, 2019 1:09 am
MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
Thank you for bringing attention to the NTSX fund. Most of us haven't heard of it. Looks like it launched in 2018 and currently has about $5m in assets, while the PIMCO fund launched over ten years ago. Still, it looks look a very promising option.

These two funds are extremely different from each other. Both look like they could be among the best in their niche.

(1) PSLDX uses derivatives for equities that distribute lots of capital gains. It looks like one of the least tax-efficient investments out there. As a result in needs to be held in a tax-advantaged account. In a way, only the existence of tax-advantaged accounts makes PSLDX a viable investment.

NTSX is designed for tax efficiency, making it suitable for taxable accounts. It's a passive investment in the S&P 500: "The fund invests 90% of its net assets in the 500 largest U.S. stocks by market capitalization." So it doesn't have much cause to distribute capital gains on the 0.9x exposure to the S&P 500. Big +1 for NTSX there.

NTSX also gives convenient access to the tax advantages of treasury futures, which now are of use without all the capital gains on stocks: "In instances where fixed income total returns are primarily driven by interest income and held in taxable accounts, any income distributions are subject to withholding tax rates of up to 39.6%. By comparison, capital gains on Treasury futures contracts are taxed at 60% long-term, 40% short-term capital gains rates." This could make it not just a more efficient use of cash but also more tax-efficient than buying an unlevered bond fund.

(2) NTSX has exposure to 0.9x the S&P 500. PSLDX has exposure to 1.0x the S&P 500 and roughly 0.7x exposure to bonds with credit risk (corporate, high yield, international). Credit risk has some correlation to beta.

Both also provide exposure to term risk. In the recent past, when term risk has had negative correlation with beta, this has given PSLDX a net beta loading of about 0.9 and given NTSX a net beta loading of about 0.8, if using a CAPM factor regression. At the same time, by taking on additional credit and term risk, beyond what NTSX takes on, they provided annualized alpha of 13.81% for PSLDX and 5.44% for NTSX.

https://www.portfoliovisualizer.com/fac ... sisResults

Basically, PSLDX is giving you a lot more risk for your money. For those who want to take that risk and have tax-advantaged space, the expense ratio does not do enough to take away from the additional exposure to market, credit, and term risks, when those risks are paying positive premiums. That's not to say more risk is always better, but those who want exposure to those risks and are willing to pay for it, may prefer PSLDX.

Expense ratio / leverage is not a meaningful measure for maximizing portfolio performance. If the gains from additional leverage are more than the expense ratio and other costs, the ER / leverage can be worse with the result still being better.

(3) NTSX may perform a bit better in a period of rising rates, due to its lower duration exposure of 3 to 8 years. This makes it an interesting holding for those who want to hedge the risks of rising rates.

(4) NTSX should perform a bit better in a market decline, due to its lower exposure to market and credit risks, using only treasuries on the bond side. This makes it interesting for those who want a more defensive holding.

In short, PSLDX is better for those who want to take on more market / credit / term risk (it's more loaded on all three risks) and have tax-advantaged space, while NTSX is better for those who want to take on less term risk, no credit risk, and slightly less market risk... or those who need a holding for a taxable account.

I would definitely consider buying NTSX in taxable. Thanks again for pointing it out.
Looks like NTSX just got the Boglehead bump!

Over the last week, assets in NTSX have doubled from $5m to $11m. :moneybag

https://www.wisdomtree.com/etfs/asset-allocation/ntsx
https://screener.fidelity.com/ftgw/etf/ ... mbols=NTSX

Now that I own it, it’s interesting to watch PSLDX on days like yesterday: price change was 0.00% (per PIMCO website).

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Tue Aug 13, 2019 7:02 am

MoneyMarathon wrote:
Mon Aug 12, 2019 11:44 pm
If yields are flat:
If so, TMF has an expected positive return. Historically there's been about a 0.5% CAGR "rebalancing bonus" from negative correlation with UPRO. And there's also the return on the bonds held outright inside TMF, plus the spread between the short term borrowing rate and the long term, minus the expense ratio. All told, it seems like you might get 4% CAGR higher than the S&P 500 if yields are flat, with 55% UPRO / 45% TMF.
Can you please elaborate how you get the 4% ? I assume you mean an additional 4% in relation to the invested equity. Your assumption was that the 55% UPRO rebalanced with 45% CASHZERO replicates the return of 100% S&P500. With 30 year treasuries at ca. 2%, cash at ca. 2%, the spread is currently ca. zero so the leverage does nothing, so you would effectively get the 2% nominal yield on 45% of the portfolio, plus 0.5% rebalancing bonus x 3 * 0.45 from rebalancing (leveraged), minus 1.1% expense ratio * 0.45, for a total excess return of ca. (2 + (0.5 * 3) - 1.1) * 0.45 = 1.08% on invested portfolio equity, or not? If we assume the spread to cash widens again to, say, 1%, if short term interest falls go 1% (wishful thinking), then the excess return would be an additional (2 - 1) * 2 (leveraged portion) * 0.45 = 0.9% in addition to the 1.08%, for a total of ca. 2% excess return ?

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 8:57 am

rascott wrote:
Tue Aug 13, 2019 1:16 am
Lee_WSP wrote:
Mon Aug 12, 2019 7:15 pm
I hope that those of us employing this strategy are only risking a small portion of our assets. However, the other side of the coin is that even a 60/40 portfolio comes with risk.

There's also the risk of not having enough to retire. That's a risk whose medicine is to increase the savings rate, but what if we've got no more expenses to cut?
I think most here are in the conservative range with this. At least I hope.

I don't see a situation where this does markedly worse than the market, unless you see a major chage in monetary policy. And that impact would be a slow moving train that you would hopefully see.
If by market, you mean the s&p 500, the strategy loses more during the 1987 flash crash, the 2000 bubble, and absolutely positively wipes all the gains out and sets you slightly below the 2008 financial crash.

The '87 flash crash is by far the worst as TMF does not ride in to save the day. The other two are bad, but if you stick it out, in a few years you're back ahead of the market.

I have no further historical data to look at.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Tue Aug 13, 2019 8:59 am

Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MindTheGAAP » Tue Aug 13, 2019 9:03 am

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
I was trying to jump from one train to another this morning and order didn't fill -- typical that TMF would now come back down as UPRO goes frolicking through the field!
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by perplexed » Tue Aug 13, 2019 9:05 am

Yes, I did so following your footsteps, in one of my pies!
Don't know how to Thank you enough, HedgeFundie. Who knows what future holds, but your post and hard work have made me money in the last 5 months way more than I have anticipated.
Last edited by perplexed on Tue Aug 13, 2019 11:02 am, edited 3 times in total.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 » Tue Aug 13, 2019 9:07 am

Ok, changing my 40/60 to 50/50 quarterly. I get the idea of 55/45 given the current low rates, but I like the simplicity of equal chunks. It was my original proposed allocation anyway. Keeping the other 1/3 20 day risk parity and 1/3 20% volatility monthly.

Its crazy how much more I'm in tune with these movements which amounts to about 5% of my overall allocation vs the rest of my portfolio lol.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dziuniek » Tue Aug 13, 2019 9:09 am

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
Now that sounds like a market-timing comment :)

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by rascott » Tue Aug 13, 2019 9:24 am

Lee_WSP wrote:
Tue Aug 13, 2019 8:57 am
rascott wrote:
Tue Aug 13, 2019 1:16 am
Lee_WSP wrote:
Mon Aug 12, 2019 7:15 pm
I hope that those of us employing this strategy are only risking a small portion of our assets. However, the other side of the coin is that even a 60/40 portfolio comes with risk.

There's also the risk of not having enough to retire. That's a risk whose medicine is to increase the savings rate, but what if we've got no more expenses to cut?
I think most here are in the conservative range with this. At least I hope.

I don't see a situation where this does markedly worse than the market, unless you see a major chage in monetary policy. And that impact would be a slow moving train that you would hopefully see.
If by market, you mean the s&p 500, the strategy loses more during the 1987 flash crash, the 2000 bubble, and absolutely positively wipes all the gains out and sets you slightly below the 2008 financial crash.

The '87 flash crash is by far the worst as TMF does not ride in to save the day. The other two are bad, but if you stick it out, in a few years you're back ahead of the market.

I have no further historical data to look at.
Are you talking about the original 40/60....or the "new" allocation? The 40/60 had no worse drawdowns than the SP500....it's right in the original post.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 9:45 am

rascott wrote:
Tue Aug 13, 2019 9:24 am
Lee_WSP wrote:
Tue Aug 13, 2019 8:57 am
rascott wrote:
Tue Aug 13, 2019 1:16 am
Lee_WSP wrote:
Mon Aug 12, 2019 7:15 pm
I hope that those of us employing this strategy are only risking a small portion of our assets. However, the other side of the coin is that even a 60/40 portfolio comes with risk.

There's also the risk of not having enough to retire. That's a risk whose medicine is to increase the savings rate, but what if we've got no more expenses to cut?
I think most here are in the conservative range with this. At least I hope.

I don't see a situation where this does markedly worse than the market, unless you see a major chage in monetary policy. And that impact would be a slow moving train that you would hopefully see.
If by market, you mean the s&p 500, the strategy loses more during the 1987 flash crash, the 2000 bubble, and absolutely positively wipes all the gains out and sets you slightly below the 2008 financial crash.

The '87 flash crash is by far the worst as TMF does not ride in to save the day. The other two are bad, but if you stick it out, in a few years you're back ahead of the market.

I have no further historical data to look at.
Are you talking about the original 40/60....or the "new" allocation? The 40/60 had no worse drawdowns than the SP500....it's right in the original post.
Both strategies have a worse drawdown in 87, 1999-2000, & 10/31/2008 (but only for a second before TMF rides in on a white stallion to save the day)

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by JBeck » Tue Aug 13, 2019 10:12 am

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
:sharebeer :moneybag

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Tue Aug 13, 2019 10:15 am

HawkeyePierce wrote:
Mon Aug 12, 2019 11:38 pm
MotoTrojan wrote:
Mon Aug 12, 2019 11:18 pm
MoneyMarathon wrote:
Mon Aug 12, 2019 10:45 pm
drock wrote:
Mon Aug 12, 2019 10:04 pm
If we're worried about bond rates and duration and accepting that we're not going to make as much on your bond positions going forward, would revisiting using TYD over TMF have any merit?
EDV (extended duration treasuries) tends to outperform TYD (3x intermediate) slightly when yields are flat or increasing, apparently due to the Cost Matters Hypothesis (lower expense ratio). TYD might have a small edge when yields are falling (but not much). EDV has a much smaller bid-ask spread (lower trading costs) and lower tracking error... which seems to tip the scales definitively over to EDV (any time a Vanguard ETF can play a similar role as a Direxion ETF, prefer Vanguard IMO).
Correct. Furthermore, my backtesting suggests that there is no significant difference between how you get your weighted-duration exposure, so the real question is what weighted-duration you want. Using TYD at the same allocation as you would've used TMF will simply reduce your duration exposure; yes it will cause less of a drag/loss during rising rate periods, but it also will have less protection during an equity crisis, and less rebalancing bonus when correlations are negative; not that it is a bad move, just a bad way to implement it. There may be some merit to going ultra-short with mega leverage (like the individuals using 2-year treasury futures) but my backtesting only looked at ETFs that may be used in a manner similar to the OG strategy.

As noted, there really is (in my humble opinion) no use for TYD since you can replicate any use of it with a combo of TMF & a lower duration fund such as IEF, TLT, and/or EDV, reducing your overall exposure to borrowing costs and high expense ratios. By using TYD you are simply increasing the amount of high-cost leveraged funds you need to hold to get your desired duration exposure.

In general EDV is a very interesting fund as it gets pretty good duration exposure (about 1/2 the effectiveness as TMF) with no leverage costs or high expenses. ~40/60 UPRO/EDV is a pretty balanced risk profile, but I am greedy :twisted:.
Pardon if this has been covered before, but is there a good model for EDV like we have for UPRO and TMF, given that the fund is only 11 years old?

Curious to see what it looks like in PV. I'll admit I'm tempted to swap TMF for EDV given the lower cost. 85 fewer basis points in performance for TMF to overcome.
It is imperfect but you can make play around with a monthly rebalanced blend of simulated TMF and long-bonds to get a rough estimate. Siamonds spreadsheet also has STRIPS back to 1955, but that is annual rebalance only.

Directly replacing the same allocation of TMF with EDV will reduce leverage/expense costs and will help in rising rate periods, but will not provide as much potential ballast in an equity downturn; with UPRO =<40% though it has merit.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by ocrtech » Tue Aug 13, 2019 10:18 am

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
I'm using Inverse Volatility with a 60 trading day lookback, exponentially weighted, and rebalance monthly. I rebalanced on Aug 1st to 54% UPRO / 46% TMF. Both the pullback yesterday as well as the pop we are getting today have so far been very positive for me.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dspencer » Tue Aug 13, 2019 10:44 am

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
I haven't changed my allocation, but I did decide to rebalance to get from roughly 30/70 (UPRO/TMF) back to 40/60. Unfortunately, due to the M1 trading window I missed the 1 day gain. Oh well, it could always have gone the other way.

I have never been convinced by all the more complex rebalancing strategies because I don't understand the logic of why they should work going forward. I do think there is merit to looking at current market conditions and seeing whether they justify a change in allocation.

Despite some real world examples, I think there are sound fundamental reasons to be skeptical of bonds going strongly negative. At a minimum, I believe that the risk-reward becomes much less favorable as rates approach zero. It seems logical to underweight LTT at some point for that reason. Sure it's market timing, but that's just one more reason I wouldn't do this with a substantial portion of my assets.

My big questions are: How close to zero should a change be made? Should the allocation be shifted to UPRO or to a 3rd asset such as gold, TIPS or real estate? My main reason for considering a 3rd asset would be to hedge inflation risk. Predicting that risk is another un-Bogle thing to do, but I think there are some reasonable arguments that it makes sense given current government/market conditions. It also seems to be a good fit in a portfolio that seems particularly vulnerable to an inflationary environment.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by physixfan » Tue Aug 13, 2019 11:03 am

ocrtech wrote:
Tue Aug 13, 2019 10:18 am
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
I'm using Inverse Volatility with a 60 trading day lookback, exponentially weighted, and rebalance monthly. I rebalanced on Aug 1st to 54% UPRO / 46% TMF. Both the pullback yesterday as well as the pop we are getting today have so far been very positive for me.
What tool do you use to calculate this? Thanks!

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by ocrtech » Tue Aug 13, 2019 11:22 am

physixfan wrote:
Tue Aug 13, 2019 11:03 am
What tool do you use to calculate this? Thanks!
I use data downloaded from Yahoo and use excel to do the calculations. However, minus the exponential weighting, you can get the same information from Portfolio Visualizer.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 11:53 am

comeinvest wrote:
Tue Aug 13, 2019 7:02 am
MoneyMarathon wrote:
Mon Aug 12, 2019 11:44 pm
If yields are flat:
If so, TMF has an expected positive return. Historically there's been about a 0.5% CAGR "rebalancing bonus" from negative correlation with UPRO. And there's also the return on the bonds held outright inside TMF, plus the spread between the short term borrowing rate and the long term, minus the expense ratio. All told, it seems like you might get 4% CAGR higher than the S&P 500 if yields are flat, with 55% UPRO / 45% TMF.
Can you please elaborate how you get the 4% ? I assume you mean an additional 4% in relation to the invested equity. Your assumption was that the 55% UPRO rebalanced with 45% CASHZERO replicates the return of 100% S&P500. With 30 year treasuries at ca. 2%, cash at ca. 2%, the spread is currently ca. zero so the leverage does nothing, so you would effectively get the 2% nominal yield on 45% of the portfolio, plus 0.5% rebalancing bonus x 3 * 0.45 from rebalancing (leveraged), minus 1.1% expense ratio * 0.45, for a total excess return of ca. (2 + (0.5 * 3) - 1.1) * 0.45 = 1.08% on invested portfolio equity, or not? If we assume the spread to cash widens again to, say, 1%, if short term interest falls go 1% (wishful thinking), then the excess return would be an additional (2 - 1) * 2 (leveraged portion) * 0.45 = 0.9% in addition to the 1.08%, for a total of ca. 2% excess return ?
It was just a big number. Adds in more wishful thinking (and maybe also a different yield than there is now).

Your math sounds closer to what to expect from today if flat.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Tue Aug 13, 2019 12:32 pm

MoneyMarathon wrote:
Tue Aug 13, 2019 11:53 am


It was just a big number. Adds in more wishful thinking (and maybe also a different yield than there is now).

Your math sounds closer to what to expect from today if flat.
Can you remind me how you calculated the rebalancing bonus? In the past I did comparisons of the return of TMF & UPRO alone, and then compared the rebalanced portfolio return to the weighted average return based on allocation. I seem to recall you comparing each holding with CASHZERO but curious how my method would compare. I can't recall the exact magnitude but the actual realized CAGR was always higher than the weighted average of both assets, indicating a bonus. I would think this is a good comparison even when rates aren't range-bound (it checked out from 1955-1982 too when TMF was losing).

EDIT/ADD: For the full period 1955-2019 UPRO returned 10.56% and TMF 2.31%; at 55/45 UPRO/TMF that should be a 6.85% return, but the actual was 12% with quarterly rebalance. That seems like a much bigger bonus than 0.5%...?

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by AZAttorney11 » Tue Aug 13, 2019 1:07 pm

Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by LadyGeek » Tue Aug 13, 2019 1:12 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
Here's Market Timer's classic thread: A different approach to asset allocation

I would caution investors that seeing a bunch of "me too" posts does not mean this approach is right for you. There are several posts cautioning investors that this approach has increased risk (above a total market diversified portfolio). If you want to "experiment", consider doing so with no more than 5% of your portfolio.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dspencer » Tue Aug 13, 2019 1:22 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
I am doing the original 40% UPRO/ 60% TMF using my Roth IRA which is a small portion of my overall portfolio.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP » Tue Aug 13, 2019 1:42 pm

LadyGeek wrote:
Tue Aug 13, 2019 1:12 pm
AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
Here's Market Timer's classic thread: A different approach to asset allocation

I would caution investors that seeing a bunch of "me too" posts does not mean this approach is right for you. There are several posts cautioning investors that this approach has increased risk (above a total market diversified portfolio). If you want to "experiment", consider doing so with no more than 5% of your portfolio.
This strategy is risky enough. Adding on margin is just a tweet away from complete wipeout.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 1:47 pm

MotoTrojan wrote:
Tue Aug 13, 2019 12:32 pm
Can you remind me how you calculated the rebalancing bonus?
Here:
MoneyMarathon wrote:
Sun Jul 14, 2019 4:11 am
privatefarmer wrote:
Sun Jul 14, 2019 12:08 am
a narrow yield curve is of concern however I am not one to try and "time the market" so I would look at this strategy for the long-term as a buy-and-hold strategy. This strategy has worked very well since 1983 even though borrowing costs were significantly higher back in the 80s.
privatefarmer wrote:
Sun Jul 14, 2019 12:08 am
But I think that we have to remember that the strategy is not relying on TMF or LTTs to generate returns. The strategy rather relies on LTTs/TMF to provide negative correlation to stocks when the market tanks, thus increasing our sharpe ratio. You have to remember that we are leveraging the heck out of stocks as well so even though stocks are "only" 40% of our portfolio because of the leverage we effectively have 120% exposure to stocks. So the LTTs are more to soften the downside risk vs provide actual return.
I would like to tease out an important point here. Consider these different goals and observations:
  • not "timing the market," long-term buy-and-hold strategy
  • this strategy has worked very well since 1983
  • the strategy is not relying on TMF or LTTs to generate returns
  • rather relies on LTTs/TMF to provide negative correlation to stocks when the market tanks
All of these points individually seem pretty intuitive:
  • it's a fixed allocation
  • since 1983 is a long time... and maybe a more relevant time period since it's more recent?
  • bonds are for safety
  • bonds have gone up when stocks go down
The apparently counter-intuitive thing here is that TMF has generated great returns... during 1987-2018. That's the most important part of what makes the backtest with a full TMF allocation so amazing. The "stock market tanks" anti-correlation-based rebalancing effects are also a factor, but a secondary one: if TMF was a drag or did little for the portfolio otherwise, but just had great anti-correlation, things would have been very different for a backtest on this range of dates.

Using Simba's spreadsheet:

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 7.77% CAGR and 10.97x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 8.07% CAGR and 11.96x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 16.89% CAGR and 147.45x return.

Backing out the different factors, if there were no anti-correlation effect during annual rebalancing (just zero correlation), we might have expected to get a return of 10.97 x 11.96 = 131.2x. A return of 131.2x over 32 years is a CAGR of 16.46%. We actually got a CAGR of 16.89% which allowed us to get an extra 12.4% accumulated over a 32 year time period.

The added value of 60% TMF over the 32 years here was divided between 11.96x return, by itself with zero correlation to no-yield cash, and an extra 1.12x return thanks to the incremental benefit of being anti-correlated with UPRO. Understandably, then, I believe it should be plain that if TMF doesn't deliver strong positive yield all on its own, then you're not going to get it anything close to working like it did 1980s to present.

I think there is possibly an argument that TMF rebalancing with plain cash delivers its own premium, maybe by making good trades. But a starting 60% TMF (not even 100%) without rebalancing actually did even better. Without rebalancing into cash, a portfolio that drifted into a larger percentage allocation to TMF over time returned 15.6x or 8.96% CAGR. TMF just plain did well in this time period.

The main reason why TMF did very well (not middling, neutral, or negative) is simply linked to how the price of a bond is calculated.

That is, the yield on 30-year treasuries went down.

If the 30-year treasury yield had gone up during this time period, you'd get some very poor results like the ones that are hidden when choosing a time period like this that (yes) is long, (yes) is recent... but which, unfortunately, is also (pretty clearly, IMO, given that the entire long term, secular trend here was rates going down with only a bit of backtracking just to go more down) a biased / error-prone way to try to make an averaged estimate using historical data for the expected return for leveraged long-term treasuries. And, of course, accordingly, it's also not going to give an unbiased estimate for the risks and expected return of a two-fund portfolio with a 60% allocation to them.

It could still make a lot of money, of course. But to me, at least, it looks like (in part) a bet that interest rates and inflation won't go up significantly over the time period invested. If that's true, it pays off, at least a little. If that's not true, it could crash and burn. And if the 30-year yield actually keeps going down from here over the next 20-30 years, combined with strong economic growth, then sure, I guess someone might get similar results.
I consider mitigation of the volatility decay thanks to rebalancing with zero-correlation zero-interest cash, and then separately consider the 'rebalancing bonus due to negative correlation'. To get the returns of the individual components, I consider them inclusive of the mitigation of the volatility drag thanks to rebalancing with zero-correlation zero-interest cash. This provides a better representation of the amount of return from the individual components and the amount of return from assets having negative correlation.

Putting 100% of any portfolio into a 3x leveraged ETF can get crushed from volatility drag, but it doesn't take much of anything special to make a lot of that volatility drag go away. See also one of my first posts in this thread, trying to understand better the effect of rebalancing.
MoneyMarathon wrote:
Thu Jul 11, 2019 4:31 am
I've been working on getting a better understanding of the nature of "volatility decay." Rebalancing interacts a lot.

Here is 100% SDY (blue) and 50% SDYL, 50% CASHX (red) with no rebalancing. SDYL is a monthly resetting leveraged 2x ETF.

Image

Notice that the SDYL portfolio is shifting its allocation over time to have more SDYL than the original 50%. This increases its exposure to the underlying, over time, to be greater than 1x. Basically, beta is drifting up over time, and as the beta increases, the portfolio does what you'd expect: further gains are magnified, but so are subsequent losses.

That is, until you rebalance. At that point you can reset the portfolio to have 1x exposure by making the 2x part be 50% again. The only issue still remaining here is that you waited to reset the portfolio, so you've already drifted away from your underlying due to the already-deviated returns of the previous 11 months in which you had not yet rebalanced. With annual rebalancing, the two portfolios are much closer.

Image

Because the path dependency of returns can work for you or against you, the annual-rebalanced portfolio here gains and loses several times compared to its underlying. But once you rebalance monthly, with a monthly-resetting 2x ETF at 50% weight, the tracking error of the ETF itself is the only remaining issue.

Image

How does it track so well now? The basic idea in this case is that you take about half of the cash off the table when you win (and your next bet would naturally be bigger), but you put about half of what was lost back in when you lose (and your next bet would naturally be smaller). This is intended to keep a relatively-constant level of exposure in the next bet (it's not a prediction, no reversion is really expected).
Rebalancing with anything that isn't correlated is going to do a lot to offset the volatility decay and get you closer to the return of the underlying, because it will let you take some money off the table when the underlying is up and put some back in when the underlying is down.

However, if the underlying didn't have strong positive returns, you won't get strong positive returns by mitigating volatility decay. You need the strong positive returns from the underlying in order for the mitigation of the volatility decay to provide strong positive returns overall. If the underlying had weak returns, then you may still see some rebalancing bonus from negative correlation (as I've described it), but you won't get the humongous advantages from rebalancing (that someone would assume with a naive calculation), because that's counting a lot of the effect where you're just preserving the gains of leveraging the underlying from being drained away by volatility decay.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by samsdad » Tue Aug 13, 2019 1:47 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
Present—in a variation of this; may vary it more in the future.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 1:49 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now)
I'm also not participating, but I bought PSLDX.

https://www.pimco.com/en-us/investments ... -fund/inst
Last edited by MoneyMarathon on Tue Aug 13, 2019 1:49 pm, edited 1 time in total.

Freefun
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Freefun » Tue Aug 13, 2019 1:49 pm

I’m in with a small amount.
Remember when you wanted what you currently have?

Hydromod
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Hydromod » Tue Aug 13, 2019 2:10 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
I'm in with my Roth IRA (<5% of total portfolio so far).

I'm not quite settled on the details of my strategy yet, but I'm leaning towards a risk budget approach with either periodic (monthly to quarterly) rebalancing or rebalancing based on (i) bands that trigger with deviation of 15 or 20% and (ii) minimum rebalancing frequency of 2 to 3 weeks. I will likely use 60-day lookback for volatility calculations.

The risk budget approach adjusts risk parity weights using a risk budget parameter for each asset, which allows preferential tilting towards or away from UPRO. I am considering adaptively adjusting the risk budget parameter based on position in the business cycle, using an index such as the unemployment index, assigning the UPRO risk budget between 0 and 80%. A risk budget parameter of zero sets the portfolio entirely to TMF. Note that the UPRO risk budget parameter is 77% with the 55/45 weighting with the UPRO/TMF volatilities that the original 40/60 scheme was based on; however, in backtesting the 60-day lookback generated occasional UPRO weights above 70% and once to 95%. I expect that the time-averaged weighting will likely be comparable to or less than the 55/45 weighting.

The adaptive change in the risk budget parameter would likely require at least four months for complete switchover from maximum to minimum, reducing whipsaws.

Backtesting suggests that an approach like this would have increased CAGR by 15 to 40 percent over the 40/60 strategy from 1987 to 2019. The index timing component appears to have been responsible for less than half of the gains, the rest from adaptively recalculating risk parity weights.

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