HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
ltdshred
Posts: 10
Joined: Sun Jul 07, 2019 9:41 pm

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

Post by ltdshred » Sat Oct 05, 2019 12:03 pm

MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
ltdshred wrote:
Sat Oct 05, 2019 11:13 am
Does someone know how to create the TQQQ and TMF simulations in PV? I want to backtest these strategies against the 90s and lost decade of 2000s doing a 40-60, 55-45, 60-40 w/ NASDAQ.
TMF exists back to 1955 (see thread 1).
How do you get the simulation in PV? Do you download it somewhere? I can only see back to 2010 in the tool as of now

get_g0ing
Posts: 548
Joined: Sat Dec 09, 2017 11:09 am

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

Post by get_g0ing » Sat Oct 05, 2019 12:26 pm

MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sat Oct 05, 2019 12:30 pm

sfmurph wrote:
Sat Oct 05, 2019 11:16 am
MotoTrojan wrote:
Fri Oct 04, 2019 3:31 pm
43/57 UPRO/EDV actually, same equity/duration ratio as OP’s 55/45 but with a bit less leverage. My main reason; volatility decay. If rates bounce around for decades but stay around 2%, TMF will likely be down a good bit while EDV will have enjoyed a nice average 2% return plus some rebalancing bonus (which TMF also would have). TMF is great for if rates continue down, but starting from 2% doesn’t leave a lot of room for that without getting into an economic realm never before seen.
What's the calculation to see that 43/57 UPRO/EDV and 55/45 UPRO/TMF have same equity/duration ratio? I see that EDV has an effective duration of 24.4 years (from e*trade) and someone else here has said that TMF has an effective duration of 53 years (though I don't know where that number comes from). I would think this would be a straightforward calculation, but I don't see it.
The duration of TLT is currently roughly 18

3x this gets you to roughly 54.


You can go look at TMF at the fund's website and it will list its current duration.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sat Oct 05, 2019 12:44 pm

caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am
caklim00 wrote:
Fri Oct 04, 2019 4:10 pm
I'm not sure there is a really good way to do this in taxable. I'm considering using NTSX (Wisdomtree 90Equity/60 Int Term Treasuries) but that's nothing like this adventure. I'm currently trying to weigh out the tax consequences of using this and also the opportunity cost of not plugging more into SCV. That said I may use this as an opportunity to increase my bond allocation (even if it means some -Cash) I'm not sure what I would do though if I end upm with a large loss in this fund and need to tax loss harvest. Moto, what are your plans? Aren't u using NTSX now?

Code: Select all

NTSX uses futures contracts to construct what is effectively a leveraged 60/40 portfolio of US equities and Treasurys. The fund places 90% of its assets in US equities and the remaining 10% in Treasury futures contracts. The notional exposure of the Treasury futures equals 60% of the fund’s assets. The resulting exposure is equivalent to a 90/60 allocation to stocks and Treasurys, or a 60/40 allocation leveraged 150%. The equity allocation will generally consist of US large-caps, weighted by market cap. Treasury exposure will range in maturity between 2 and 30 years, with a target duration of 3 to 8 years.
I don't own any long terms bonds other than EDV which I have as part of my small allocation to this.

As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 12:45 pm

get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.

Lee_WSP
Posts: 1170
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

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

Post by Lee_WSP » Sat Oct 05, 2019 1:09 pm

MotoTrojan wrote:
Sat Oct 05, 2019 12:45 pm
get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.
A signed trade deal will provide a boost to equities, maybe even to 3300 depending on the terms, but long term, I'm not so sure the fundamentals support the stratospheric growth we have been experiencing.

I prognosticate that we'll end the week with "progress" but nothing huge and the S&P will brush up against the all time highs again. That said, I'm sure I'm wrong.

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 1:19 pm

Lee_WSP wrote:
Sat Oct 05, 2019 1:09 pm
MotoTrojan wrote:
Sat Oct 05, 2019 12:45 pm
get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.
A signed trade deal will provide a boost to equities, maybe even to 3300 depending on the terms, but long term, I'm not so sure the fundamentals support the stratospheric growth we have been experiencing.

I prognosticate that we'll end the week with "progress" but nothing huge and the S&P will brush up against the all time highs again. That said, I'm sure I'm wrong.
My predictions will be validated/refuted when the S&P500 is well above 3300; if it’s there in 2-3 decades we have bigger problems.

sfmurph
Posts: 9
Joined: Mon Aug 12, 2019 8:15 pm

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

Post by sfmurph » Sat Oct 05, 2019 1:43 pm

rascott wrote:
Sat Oct 05, 2019 12:30 pm
sfmurph wrote:
Sat Oct 05, 2019 11:16 am
MotoTrojan wrote:
Fri Oct 04, 2019 3:31 pm
43/57 UPRO/EDV actually, same equity/duration ratio as OP’s 55/45 but with a bit less leverage. My main reason; volatility decay. If rates bounce around for decades but stay around 2%, TMF will likely be down a good bit while EDV will have enjoyed a nice average 2% return plus some rebalancing bonus (which TMF also would have). TMF is great for if rates continue down, but starting from 2% doesn’t leave a lot of room for that without getting into an economic realm never before seen.
What's the calculation to see that 43/57 UPRO/EDV and 55/45 UPRO/TMF have same equity/duration ratio? I see that EDV has an effective duration of 24.4 years (from e*trade) and someone else here has said that TMF has an effective duration of 53 years (though I don't know where that number comes from). I would think this would be a straightforward calculation, but I don't see it.
The duration of TLT is currently roughly 18

3x this gets you to roughly 54.


You can go look at TMF at the fund's website and it will list its current duration.
OK, yes. I see on the Direxion TMF page that the duration of the index is 17.96. Is multiplying that by 3 right? I know that's the intent of the ETF, but folks here have said that the effective multiplier is more like 2x.

And then, what to do with the duration? I don't see how the two durations (EDV=24 years and TMF=54 years) relate to the 43/57 UPRO/EDV and 55/45 UPRO/TMF ratios.

sfmurph
Posts: 9
Joined: Mon Aug 12, 2019 8:15 pm

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

Post by sfmurph » Sat Oct 05, 2019 1:52 pm

MotoTrojan wrote:
Sat Oct 05, 2019 11:57 am
sfmurph wrote:
Sat Oct 05, 2019 11:16 am
MotoTrojan wrote:
Fri Oct 04, 2019 3:31 pm
43/57 UPRO/EDV actually, same equity/duration ratio as OP’s 55/45 but with a bit less leverage. My main reason; volatility decay. If rates bounce around for decades but stay around 2%, TMF will likely be down a good bit while EDV will have enjoyed a nice average 2% return plus some rebalancing bonus (which TMF also would have). TMF is great for if rates continue down, but starting from 2% doesn’t leave a lot of room for that without getting into an economic realm never before seen.
What's the calculation to see that 43/57 UPRO/EDV and 55/45 UPRO/TMF have same equity/duration ratio? I see that EDV has an effective duration of 24.4 years (from e*trade) and someone else here has said that TMF has an effective duration of 53 years (though I don't know where that number comes from). I would think this would be a straightforward calculation, but I don't see it.
I showed the numbers a while back but to be fair I actually used annual volatility of EDV and TMF data in the Simba spreadsheet as a proxy of duration (volatility is what really matters anyways) from 1955-2018, then from there it’s simple math (used Excel) to adjust the allocation until the ratio of volatility is equal.
I thought I'd replied to this already, but I don't see it.

I tried downloading the Simba spreadsheet to understand this, but while I see EDV there, I don't see TMF or anything about volatility. Maybe I have the wrong spreadsheet? I do see where Standard Deviation of CAGR is calculated. By "adjusting the allocation" do you mean the UPRO/EDV allocation until the ratio of volatility is equal to 55/45 UPRO/TMF?

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 1:55 pm

sfmurph wrote:
Sat Oct 05, 2019 1:43 pm
rascott wrote:
Sat Oct 05, 2019 12:30 pm
sfmurph wrote:
Sat Oct 05, 2019 11:16 am
MotoTrojan wrote:
Fri Oct 04, 2019 3:31 pm
43/57 UPRO/EDV actually, same equity/duration ratio as OP’s 55/45 but with a bit less leverage. My main reason; volatility decay. If rates bounce around for decades but stay around 2%, TMF will likely be down a good bit while EDV will have enjoyed a nice average 2% return plus some rebalancing bonus (which TMF also would have). TMF is great for if rates continue down, but starting from 2% doesn’t leave a lot of room for that without getting into an economic realm never before seen.
What's the calculation to see that 43/57 UPRO/EDV and 55/45 UPRO/TMF have same equity/duration ratio? I see that EDV has an effective duration of 24.4 years (from e*trade) and someone else here has said that TMF has an effective duration of 53 years (though I don't know where that number comes from). I would think this would be a straightforward calculation, but I don't see it.
The duration of TLT is currently roughly 18

3x this gets you to roughly 54.


You can go look at TMF at the fund's website and it will list its current duration.
OK, yes. I see on the Direxion TMF page that the duration of the index is 17.96. Is multiplying that by 3 right? I know that's the intent of the ETF, but folks here have said that the effective multiplier is more like 2x.

And then, what to do with the duration? I don't see how the two durations (EDV=24 years and TMF=54 years) relate to the 43/57 UPRO/EDV and 55/45 UPRO/TMF ratios.
As rates change duration changes; as I stated I used the volatility of the estimated returns from 1955-2018 via the Simba spreadsheet as a proxy so it’s no surprise it doesn’t add up today.

Volatility_UPRO X 0.55 / Volatility_TMF X 0.45 ~= Vol_UPRO X 0.43 / Vol_EDV X 0.57. Regardless though it’s an arbitrary allocation and I picked it based on past returns/drawdowns.

Effective multiplier is due to volatile decay; UPRO since inception is closer to 5X. Hence my avoidance of TMF when rates are so low. I still think index duration X 3 is a good approximation; there is no perfect answer.

caklim00
Posts: 1922
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Sat Oct 05, 2019 2:16 pm

rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am
caklim00 wrote:
Fri Oct 04, 2019 4:10 pm
I'm not sure there is a really good way to do this in taxable. I'm considering using NTSX (Wisdomtree 90Equity/60 Int Term Treasuries) but that's nothing like this adventure. I'm currently trying to weigh out the tax consequences of using this and also the opportunity cost of not plugging more into SCV. That said I may use this as an opportunity to increase my bond allocation (even if it means some -Cash) I'm not sure what I would do though if I end upm with a large loss in this fund and need to tax loss harvest. Moto, what are your plans? Aren't u using NTSX now?

Code: Select all

NTSX uses futures contracts to construct what is effectively a leveraged 60/40 portfolio of US equities and Treasurys. The fund places 90% of its assets in US equities and the remaining 10% in Treasury futures contracts. The notional exposure of the Treasury futures equals 60% of the fund’s assets. The resulting exposure is equivalent to a 90/60 allocation to stocks and Treasurys, or a 60/40 allocation leveraged 150%. The equity allocation will generally consist of US large-caps, weighted by market cap. Treasury exposure will range in maturity between 2 and 30 years, with a target duration of 3 to 8 years.
I don't own any long terms bonds other than EDV which I have as part of my small allocation to this.

As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 2:35 pm

caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am
caklim00 wrote:
Fri Oct 04, 2019 4:10 pm
I'm not sure there is a really good way to do this in taxable. I'm considering using NTSX (Wisdomtree 90Equity/60 Int Term Treasuries) but that's nothing like this adventure. I'm currently trying to weigh out the tax consequences of using this and also the opportunity cost of not plugging more into SCV. That said I may use this as an opportunity to increase my bond allocation (even if it means some -Cash) I'm not sure what I would do though if I end upm with a large loss in this fund and need to tax loss harvest. Moto, what are your plans? Aren't u using NTSX now?

Code: Select all

NTSX uses futures contracts to construct what is effectively a leveraged 60/40 portfolio of US equities and Treasurys. The fund places 90% of its assets in US equities and the remaining 10% in Treasury futures contracts. The notional exposure of the Treasury futures equals 60% of the fund’s assets. The resulting exposure is equivalent to a 90/60 allocation to stocks and Treasurys, or a 60/40 allocation leveraged 150%. The equity allocation will generally consist of US large-caps, weighted by market cap. Treasury exposure will range in maturity between 2 and 30 years, with a target duration of 3 to 8 years.
I don't own any long terms bonds other than EDV which I have as part of my small allocation to this.

As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

caklim00
Posts: 1922
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Sat Oct 05, 2019 2:45 pm

MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am



As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.
How about doing something like NTSX is doing? Looks like this is spreading between various durations. It looks like NTSX has about the same amount in each of the 5 listed above. Of course, I'm learning this right nows so maybe I'm completely off base.

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 3:01 pm

caklim00 wrote:
Sat Oct 05, 2019 2:45 pm
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am

Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.
How about doing something like NTSX is doing? Looks like this is spreading between various durations. It looks like NTSX has about the same amount in each of the 5 listed above. Of course, I'm learning this right nows so maybe I'm completely off base.
For the most part the major driver is the average effective duration. NTSX’s is more in the intermediate realm which works well to counter 90% S&P500 exposure, although it’s far from the risk-parity that the original 40/60 UPRO/TMF achieves. You could get a very similar result to NTSX by picking a single treasury type and leveraging to the same effective duration.

Also as to NTSX having almost even percentage of each, realize that the 2 year portion is providing almost no duration while the long-term is supplying a good deal.

get_g0ing
Posts: 548
Joined: Sat Dec 09, 2017 11:09 am

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

Post by get_g0ing » Sat Oct 05, 2019 4:01 pm

MotoTrojan wrote:
Sat Oct 05, 2019 12:45 pm
get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.
Thanks for elucidating that, nice of you.

How many years will you be sticking to that AA of 43/57

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sat Oct 05, 2019 4:19 pm

get_g0ing wrote:
Sat Oct 05, 2019 4:01 pm
MotoTrojan wrote:
Sat Oct 05, 2019 12:45 pm
get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.
Thanks for elucidating that, nice of you.

How many years will you be sticking to that AA of 43/57
I chose this AA as a forever AA, but would probably bail out in retirement (30 years). If rates are deeply negative I may succumb to market timing.

get_g0ing
Posts: 548
Joined: Sat Dec 09, 2017 11:09 am

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

Post by get_g0ing » Sat Oct 05, 2019 4:23 pm

MotoTrojan wrote:
Sat Oct 05, 2019 4:19 pm
get_g0ing wrote:
Sat Oct 05, 2019 4:01 pm
MotoTrojan wrote:
Sat Oct 05, 2019 12:45 pm
get_g0ing wrote:
Sat Oct 05, 2019 12:26 pm
MotoTrojan wrote:
Sat Oct 05, 2019 11:58 am
Hi MotoTrojan,
What's your goal with 43/57 UPRO/EDV, I mean are you aiming/hoping for the same outcome as OP with his 55/45 UPRO/TMF?
Different strategy for the same end?

Thanks.
To beat the S&P500 without significant increase in drawdown during equity stress (but still more volatility). The added volatility/risk would be worth 1-3% extra CAGR for me which I feel it’ll do easily if rates don’t explode like they did in the 60’s. If long term rates head to 0% it will do even better.

If I had to bet I’d say it would beat the OPs original 40/60 UPRO/TMF but it’s possible the 55% UPRO carries the OP, even if TMF is a losing asset. I do not believe the OP will come anywhere near 20% CAGR over the next two decades (me either) unless equities are doing well into double-digits; if it does though I’ll still be happy as my compromise netted 17% CAGR from 1982-2018 (compared to 20%), so still huge outperformance with way less drawdown.
Thanks for elucidating that, nice of you.

How many years will you be sticking to that AA of 43/57
I chose this AA as a forever AA, but would probably bail out in retirement (30 years). If rates are deeply negative I may succumb to market timing.
Many many thanks for your well put responses in this thread buddy :sharebeer

caklim00
Posts: 1922
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Sat Oct 05, 2019 5:45 pm

MotoTrojan wrote:
Sat Oct 05, 2019 3:01 pm
caklim00 wrote:
Sat Oct 05, 2019 2:45 pm
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm



Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.
How about doing something like NTSX is doing? Looks like this is spreading between various durations. It looks like NTSX has about the same amount in each of the 5 listed above. Of course, I'm learning this right nows so maybe I'm completely off base.
For the most part the major driver is the average effective duration. NTSX’s is more in the intermediate realm which works well to counter 90% S&P500 exposure, although it’s far from the risk-parity that the original 40/60 UPRO/TMF achieves. You could get a very similar result to NTSX by picking a single treasury type and leveraging to the same effective duration.

Also as to NTSX having almost even percentage of each, realize that the 2 year portion is providing almost no duration while the long-term is supplying a good deal.
Isn't there value in spreading out the lengths of Treasuries? If I want a duration of 5 wouldn't it make sense to hold 2, 5, 10, not just 5? Just trying to make sure not to do something really stupid here :)

I get the idea of LT for providing a counter for someone that is super leveraged. But for someone with a < 100 equity position I'm thinking something more intermediate would likely provide additional returns without the crazy volatility. It appears thats what NTSX is doing... That said I can only do but so many 100K futures since its just me and I'm not running an ETF.

EDIT: I've learned a lot tonight reading a bunch of other threads. So, if I wanted to add an additional 100K bond position, I could purchase 1 ZN Treasury Furture (10 year which appears to be the most liquid). I would just need to open up a margin account at brokerage of choice (which ones are best?) and then on a quarterly basis roll into a new ZN contract? Is it this simple?

I'm really trying to decide on just using NTSX for simplicity or whether doing this on my own makes more sense.
Last edited by caklim00 on Sat Oct 05, 2019 10:23 pm, edited 1 time in total.

User avatar
7th_Diagram
Posts: 12
Joined: Fri Jan 25, 2019 11:37 pm

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

Post by 7th_Diagram » Sat Oct 05, 2019 5:55 pm

At Risk | $13K
Allocation |55% UPRO / 45% TMF
Start Date | 2019-09-26
Rebalancing | Quarterly
"You have to understand, most people are not ready to be unplugged,and many of them are so injured, so hopelessly dependent upon the system, that they will fight to protect it." | ~Morpheus

get_g0ing
Posts: 548
Joined: Sat Dec 09, 2017 11:09 am

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

Post by get_g0ing » Sat Oct 05, 2019 6:33 pm

Question for those using TQQQ instead of UPRO:
Are you using TMF or EDV for the other part? And for which reasons please?

Anyone here that did something like 43/57 TQQQ/EDV or 55/45 TQQQ/TMF?

Thanks.

keith6014
Posts: 241
Joined: Thu Jan 02, 2014 11:58 pm

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

Post by keith6014 » Sun Oct 06, 2019 8:05 am

get_g0ing wrote:
Sat Oct 05, 2019 6:33 pm
Question for those using TQQQ instead of UPRO:
Are you using TMF or EDV for the other part? And for which reasons please?

Anyone here that did something like 43/57 TQQQ/EDV or 55/45 TQQQ/TMF?

Thanks.
I am doing TQQQ/TMF (45/55). Reason: I am greedy. :mrgreen:
I have been doing it for 1.5 month so far.Just broke even last Friday (Oct 4th). Its very volitle.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 9:53 am

MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am



As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

By that logic nearly all leveraged treasuries are near guaranteed loss right now.

BTW, my "guaranteed loss" position is up over 6% in the last month.... while equities are down..... doing exactly how it should behave in a risk parity portfolio. The entire point of holding large duration in this exercise is to insure the leveraged equity portfolio.... not to really make money.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 10:21 am

caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am
rascott wrote:
Sat Oct 05, 2019 12:30 am
caklim00 wrote:
Fri Oct 04, 2019 4:10 pm
I'm not sure there is a really good way to do this in taxable. I'm considering using NTSX (Wisdomtree 90Equity/60 Int Term Treasuries) but that's nothing like this adventure. I'm currently trying to weigh out the tax consequences of using this and also the opportunity cost of not plugging more into SCV. That said I may use this as an opportunity to increase my bond allocation (even if it means some -Cash) I'm not sure what I would do though if I end upm with a large loss in this fund and need to tax loss harvest. Moto, what are your plans? Aren't u using NTSX now?

Code: Select all

NTSX uses futures contracts to construct what is effectively a leveraged 60/40 portfolio of US equities and Treasurys. The fund places 90% of its assets in US equities and the remaining 10% in Treasury futures contracts. The notional exposure of the Treasury futures equals 60% of the fund’s assets. The resulting exposure is equivalent to a 90/60 allocation to stocks and Treasurys, or a 60/40 allocation leveraged 150%. The equity allocation will generally consist of US large-caps, weighted by market cap. Treasury exposure will range in maturity between 2 and 30 years, with a target duration of 3 to 8 years.
I don't own any long terms bonds other than EDV which I have as part of my small allocation to this.

As I stated above.... just go use Treasury futures yourself.... don't pay mgmt fees. Just find the correct duration exposure you need (TMF is roughly 53 duration right now), and find where on the yield curve it makes most sense to size to your portfolio size.

You can hold most of your equity straight up. Then toss either UPRO or some micro E- mini futures on top of your normal equity ETFs, to get to your desired equity exposure.

Doing this allows you to create the identical position as the using LETFs..... but more tax efficent if you are in taxable accounts... and likely better financing rates than what these firms are paying for their swaps.

And you get to dump paying 1% mgmt fees. I personally have an issue paying a 1% mgmt fee for something as simple as 3x leveraging a SP500 index/ treasury bonds. When you can buy the same leverage yourself via some futures contracts.
Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.

You can create effective duration in many ways. Historically the Sharpe ratio has been best on 2 years.

You can read this thread for more info. EfficientInvestor has done some great research on this.


viewtopic.php?t=289049

As to why 15x....10x leverage on 2 years provides historically the same volatility as the SP500 (when interest rates are where they currently are) . Since I'm holding 150% SP500....I need 15x for risk parity.

You could go much lower leverage on longer term Treasuries... and get the equitable duration as TMF or whatever you are shooting for. But that's historically not as efficient.
Last edited by rascott on Sun Oct 06, 2019 10:54 am, edited 3 times in total.

ocrtech
Posts: 30
Joined: Sat Jul 21, 2012 2:18 pm

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

Post by ocrtech » Sun Oct 06, 2019 10:24 am

get_g0ing wrote:
Sat Oct 05, 2019 6:33 pm
Question for those using TQQQ instead of UPRO:
Are you using TMF or EDV for the other part? And for which reasons please?

Anyone here that did something like 43/57 TQQQ/EDV or 55/45 TQQQ/TMF?

Thanks.
I started in April using TMF and UPRO in a reverse, weighted volatility mixture which I rebalanced monthly with a max allocation cap of 60% on UPRO. This month I added TQQQ to the mix. I look at UPRO and TQQQ as an asset class and will now do a monthly, reverse weighted volatility mixture of TMF and the UPRO/TQQQ asset class. I'm currently sitting at 48% TMF and 52% UPRO/TQQQ.

I would like to add some international exposure to the stock asset class and am doing some backtesting. However, I'm currently not very happy with the significant increase in volatility and drawdowns it seems to add. I'm also looking at adding some additional asset classes to make this a true risk parity portfolio.

MotoTrojan
Posts: 6581
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Sun Oct 06, 2019 11:06 am

rascott wrote:
Sun Oct 06, 2019 9:53 am
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am

Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

By that logic nearly all leveraged treasuries are near guaranteed loss right now.

BTW, my "guaranteed loss" position is up over 6% in the last month.... while equities are down..... doing exactly how it should behave in a risk parity portfolio. The entire point of holding large duration in this exercise is to insure the leveraged equity portfolio.... not to really make money.
Wasn’t meant as a jab. You are taking an income loss, but yes capital gains buoyed that.

Many treasuries right now are a guaranteed income loss right now when leveraged, yup.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 11:27 am

MotoTrojan wrote:
Sun Oct 06, 2019 11:06 am
rascott wrote:
Sun Oct 06, 2019 9:53 am
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm



Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

By that logic nearly all leveraged treasuries are near guaranteed loss right now.

BTW, my "guaranteed loss" position is up over 6% in the last month.... while equities are down..... doing exactly how it should behave in a risk parity portfolio. The entire point of holding large duration in this exercise is to insure the leveraged equity portfolio.... not to really make money.
Wasn’t meant as a jab. You are taking an income loss, but yes capital gains buoyed that.

Many treasuries right now are a guaranteed income loss right now when leveraged, yup.

Agreed.... the simplified answer is that leveraged equities are the real driver of expected returns. We are all just looking for the proper insurance for this position so it doesn't kill us in drawdowns. I've decided I'd rather get the majority of my leverage via the futures market rather than using a LETF. (I am still using a bit of them to round out the portfolio to keep the ratios in balance). It took me a while to get there, but I've been amazed how simple they are to put into practice. It's basically as push button as using M1. But determining the most efficient portfolio balance to hold these while still maintaining enough cash to settle daily will be an ongoing learning process. Having $0 ETF trades now is helpful.

The flexibility of these LETF products also continues to impress me... this entire adventure has been a great learning experience.

caklim00
Posts: 1922
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Sun Oct 06, 2019 11:45 am

rascott wrote:
Sun Oct 06, 2019 9:53 am
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm
caklim00 wrote:
Sat Oct 05, 2019 11:38 am

Are you doing this strategy yourself? If so where/hiw are you buying treasury futures? I could see myself moving from 85/15 to 85/25/-10 if there is an easy way to do a treasury ladder. It would actually be ideal for me instead of using ntsx as I could continue using scv/multifactor instead of adding on a bunch of s&p 500.

Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

By that logic nearly all leveraged treasuries are near guaranteed loss right now.

BTW, my "guaranteed loss" position is up over 6% in the last month.... while equities are down..... doing exactly how it should behave in a risk parity portfolio. The entire point of holding large duration in this exercise is to insure the leveraged equity portfolio.... not to really make money.
Is there any way you could detail how you are purchasing the treatury futures? Like where is the best place to do this? What the costs are? How much you have to hold in cash or other liquid currency? I'm really considering buying a few contracts as potential way to dedge against a drop in the equity market. Any increase in value if the market continues to go up would just be gravy.

get_g0ing
Posts: 548
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by get_g0ing » Sun Oct 06, 2019 12:03 pm

I just finished Part I pages, and starting to read through Part II.

Is there consensus over whether OP's 55/45 UPRO/TMP (or 43/57 UPRO/EDV) is viable in a taxable account? Or if there's an alternative recommendation for taxable? (I did read that PSLDX was not recommended for taxable account).

Thanks.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 1:23 pm

caklim00 wrote:
Sun Oct 06, 2019 11:45 am
rascott wrote:
Sun Oct 06, 2019 9:53 am
MotoTrojan wrote:
Sat Oct 05, 2019 2:35 pm
caklim00 wrote:
Sat Oct 05, 2019 2:16 pm
rascott wrote:
Sat Oct 05, 2019 12:44 pm



Yes, I'm buying 2 year futures..... leveraged to create the same duration as TMF (which is currently 15x leverage). And then have a combo of VOO, a micro e- mini and a tiny bit of UPRO to get to 150% SP500 exposure. I've kept roughly 14% of the portfolio in BIL ETF to cover any cash storage I run into from the futures, which are marked to market daily. If my cash balance goes negative, I'm go on margin and start paying interest to the broker until I go in and sell some of the BIL ETF.

I'm up about 2% in the last month since I implemented it...as 2 year yields have dropped and the futures have gone up quite a bit. This has more than offset the leveraged equity losses.

I'm using TDA/ Think or Swim. Was going to change to Interactive Brokers, but with them all going to $0 trades, I'll just stick where I am.
Why just 2 year? I'll admit I'm very inexperienced when it comes to this...

NTSX holds
US 5YR NOTE (CBT) DEC19 XCBT 2019123112.28%
US 10YR NOTE (CBT)DEC19 XCBT 2019121912.02%
US 10YR ULTRA FUT DEC19 XCBT 2019121911.96%
US LONG BOND(CBT) DEC19 XCBT 2019121911.85%
US 2YR NOTE (CBT) DEC19 XCBT 2019123111.35%

Am I reading this correct that 2 year contract size is 200k? And the others 100k? Are you doing this in taxable or tax deferred?

I'm not sure what you mean by 2 year futures are leveraged to create the same 15x leverage.

This whole idea of leveraging treaturies is reallt interesting since it seems like it in theory is not super risky like leveraged equity.
Wrong. Enough leverage and you can go to ~0% in months in treasuries. This person feels that 2 year bonds have higher sharpe than longer term bonds so instead of 3x 20 year they’re going 15x 2 year. While this has worked historically it’s a near guaranteed loss with an inverted yield curve since the borrowing cost (X 14) is higher than the interest earned on the 15X 2-year bonds.

The US government may not default on your 2-year bond but the NAV can plummet while you still pay the cash portion from borrowing.

By that logic nearly all leveraged treasuries are near guaranteed loss right now.

BTW, my "guaranteed loss" position is up over 6% in the last month.... while equities are down..... doing exactly how it should behave in a risk parity portfolio. The entire point of holding large duration in this exercise is to insure the leveraged equity portfolio.... not to really make money.
Is there any way you could detail how you are purchasing the treatury futures? Like where is the best place to do this? What the costs are? How much you have to hold in cash or other liquid currency? I'm really considering buying a few contracts as potential way to dedge against a drop in the equity market. Any increase in value if the market continues to go up would just be gravy.

I'm using TD Ameritrade. But many brokers offer them. You'll need to open a margin account. TDA charges $2.25 per contract. Other places are cheaper. I may switch over the new Interactive Brokers Lite.

You need to decide how much leverage you actually want/ need.... basically what will your notional exposure be. And that will help determine how much bag cash to set aside in your account to avoid going on margin, and paying interest to your broker.

I'd suggest opening a paper account and buy a few there first to get a feel for it.... without risking any real money.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 2:10 pm

It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.

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

Post by HEDGEFUNDIE » Sun Oct 06, 2019 2:26 pm

305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.

User avatar
305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 2:37 pm

HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

Topic Author
HEDGEFUNDIE
Posts: 3560
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Sun Oct 06, 2019 2:46 pm

305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?
I prefer the LETFs for access to below benchmark borrowing rates through the swaps.

User avatar
305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 2:52 pm

HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:46 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?
I prefer the LETFs for access to below benchmark borrowing rates through the swaps.
The management fee more than eliminates that advantage though doesn't it ?

Either way, that's neither here nor there. At least TMF technically borrows slightly cheaper than what it invests in. But 2Y treasury futures blatantly don't. I don't get why people would be excited to do that.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 2:54 pm

HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:46 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?
I prefer the LETFs for access to below benchmark borrowing rates through the swaps.
Also you're talking about TMF right? UPRO borrows at well above RFR. And that's not even including its expense ratio.

Topic Author
HEDGEFUNDIE
Posts: 3560
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HEDGEFUNDIE » Sun Oct 06, 2019 2:55 pm

305pelusa wrote:
Sun Oct 06, 2019 2:52 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:46 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?
I prefer the LETFs for access to below benchmark borrowing rates through the swaps.
The management fee more than eliminates that advantage though doesn't it ?

Either way, that's neither here nor there. At least TMF technically borrows slightly cheaper than what it invests in. But 2Y treasury futures blatantly don't. I don't get why people would be excited to do that.
Between the negative swap spread and the volatility bonus (I shall no longer call it “decay”) the management fee more than pays for itself.

rascott
Posts: 1004
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rascott » Sun Oct 06, 2019 2:59 pm

305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Because I'm creating a risk parity portfolio. It wouldn't necessarily make sense as a stand-alone investment. Would somebody buy and hold TMF by itself? No.... it's an insurance holding. Just like this one is. Sometimes insurance just costs you money, other times it pays off.

But unless you are going to market time this based upon the yield curve.... you develop the best portfolio you can based upon long- term historical performance. Not sure why that's hard to understand. How many times did the yield curve invert since 1955?

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 3:11 pm

rascott wrote:
Sun Oct 06, 2019 2:59 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Because I'm creating a risk parity portfolio. It wouldn't necessarily make sense as a stand-alone investment. Would somebody buy and hold TMF by itself? No.... it's an insurance holding. Just like this one is. Sometimes insurance just costs you money, other times it pays off.

But unless you are going to market time this based upon the yield curve.... you develop the best portfolio you can based upon long- term historical performance. Not sure why that's hard to understand. How many times did the yield curve invert since 1955?
I'm glad that borrowing at a higher cost than your payoff and multiplying it by 15 is not hard for you to understand. It is hard for me I guess. Also, I don't base my portfolio on historical performance.

Regardless, the implication is that you're paying for the negative correlation and volatility. Instead of just buying something like EDV, the additional volatility of 2Y treasuries is worth the additional cost. Did I get that right?

Also, to be clear, risk parity is only done with positive yielding assets. A negative yielding asset should theoretically have a negative volatility and risk parity would tell you to have zero of it. So it's not risk parity in the typical Bridgewater sense.

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

Post by rascott » Sun Oct 06, 2019 3:14 pm

305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 3:23 pm

305pelusa wrote:
Sun Oct 06, 2019 3:11 pm
rascott wrote:
Sun Oct 06, 2019 2:59 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Because I'm creating a risk parity portfolio. It wouldn't necessarily make sense as a stand-alone investment. Would somebody buy and hold TMF by itself? No.... it's an insurance holding. Just like this one is. Sometimes insurance just costs you money, other times it pays off.

But unless you are going to market time this based upon the yield curve.... you develop the best portfolio you can based upon long- term historical performance. Not sure why that's hard to understand. How many times did the yield curve invert since 1955?
I'm glad that borrowing at a higher cost than your payoff and multiplying it by 15 is not hard for you to understand. It is hard for me I guess. Also, I don't base my portfolio on historical performance.

Regardless, the implication is that you're paying for the negative correlation and volatility. Instead of just buying something like EDV, the additional volatility of 2Y treasuries is worth the additional cost. Did I get that right?

Also, to be clear, risk parity is only done with positive yielding assets. A negative yielding asset should theoretically have a negative volatility and risk parity would tell you to have zero of it. So it's not risk parity in the typical Bridgewater sense.
Yeah it would be nice if EDV provided enough duration exposure to counter- balance a 150% equity position. But it does not. So it's either TMF or something that provides a similar duration.

TMF.... once paying a 1% mgmt fee is theoretically an even worse deal.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 3:29 pm

rascott wrote:
Sun Oct 06, 2019 3:14 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.
Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 3:40 pm

305pelusa wrote:
Sun Oct 06, 2019 3:29 pm
rascott wrote:
Sun Oct 06, 2019 3:14 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm
305pelusa wrote:
Sun Oct 06, 2019 2:10 pm
It's still wild to me that people are willing to borrow at ~2% to gain exposure to 1.5% yield. And then leverage that x15.

I'm still hoping someone can explain how that actually works. Please no "historically, it worked" arguments. I want to know fundamental the logic and the reason behind leveraging into a negative yielding asset.
Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.
Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks
If the financing rates on futures were higher than the risk free rate.... arbitragers would buy the underlying asset and sell the future contract..... making risk free returns above the risk free market rate over the 3 month contract period.

In practice it may well vary from that from time to time by a bit.... but never is going to be too far off the 3 month bill rate unless something really wacky is going on.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 3:52 pm

rascott wrote:
Sun Oct 06, 2019 3:40 pm
305pelusa wrote:
Sun Oct 06, 2019 3:29 pm
rascott wrote:
Sun Oct 06, 2019 3:14 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm
HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:26 pm


Minor correction: as of Friday the 2 Year was at 1.40% while the 1 Month was at 1.73%.

The only way this makes sense is if you expect the yield curve to return to normal.

On the other hand, the short end of the curve has been inverted for six months now.
Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.
Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks
If the financing rates on futures were higher than the risk free rate.... arbitragers would buy the underlying asset and sell the future contract..... making risk free returns above the risk free market rate over the 3 month contract period.

In practice it may well vary from that from time to time by a bit.... but never is going to be too far off the 3 month bill rate unless something really wacky is going on.
Let's say the financing rate of futures was 1.8%, the borrowing rate was 1.8% (the two I claim must be equal) and the 3 month treasury was 1.5%. Please walk me through the numbers as to how an arbitreur can make a riskless as profit here please. Thanks

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 4:05 pm

305pelusa wrote:
Sun Oct 06, 2019 3:52 pm
rascott wrote:
Sun Oct 06, 2019 3:40 pm
305pelusa wrote:
Sun Oct 06, 2019 3:29 pm
rascott wrote:
Sun Oct 06, 2019 3:14 pm
305pelusa wrote:
Sun Oct 06, 2019 2:37 pm


Some time ago I looked at the financing costs of futures and it wasn't quite the 3 month yield. It was a bit higher, around 2%. Thing might've changed I suppose.

If you expect the yield curve to return to normal, shouldn't you do this at the moment, once it does go back to positive ?

The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.
Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks
If the financing rates on futures were higher than the risk free rate.... arbitragers would buy the underlying asset and sell the future contract..... making risk free returns above the risk free market rate over the 3 month contract period.

In practice it may well vary from that from time to time by a bit.... but never is going to be too far off the 3 month bill rate unless something really wacky is going on.
Let's say the financing rate of futures was 1.8%, the borrowing rate was 1.8% (the two I claim must be equal) and the 3 month treasury was 1.5%. Please walk me through the numbers as to how an arbitreur can make a riskless as profit here please. Thanks

You are correct that it wouldn't be the t bill rate.... but rather the overnight borrowing rate for banks. Whether this would be the Fed Funds rate or repo rate, don't really know or care... but I assume that's what you mean by borrowing rate. The rate at which banks can access funds.

It's just that historically those are very close to the t-bill.... but not always.

User avatar
305pelusa
Posts: 906
Joined: Fri Nov 16, 2018 10:20 pm

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

Post by 305pelusa » Sun Oct 06, 2019 4:12 pm

rascott wrote:
Sun Oct 06, 2019 4:05 pm
305pelusa wrote:
Sun Oct 06, 2019 3:52 pm
rascott wrote:
Sun Oct 06, 2019 3:40 pm
305pelusa wrote:
Sun Oct 06, 2019 3:29 pm
rascott wrote:
Sun Oct 06, 2019 3:14 pm



The 3 month was roughly 2% not long back. Now it's closer to 1.75.

Arbitrage basically requires that futures markets have financing rates right at the 3 month risk free rate. Otherwise people would buy the underlying and short the futures contract to make guaranteed money in excess of risk free rate.
Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks
If the financing rates on futures were higher than the risk free rate.... arbitragers would buy the underlying asset and sell the future contract..... making risk free returns above the risk free market rate over the 3 month contract period.

In practice it may well vary from that from time to time by a bit.... but never is going to be too far off the 3 month bill rate unless something really wacky is going on.
Let's say the financing rate of futures was 1.8%, the borrowing rate was 1.8% (the two I claim must be equal) and the 3 month treasury was 1.5%. Please walk me through the numbers as to how an arbitreur can make a riskless as profit here please. Thanks

You are correct that it wouldn't be the t bill rate.... but rather the overnight borrowing rate for banks. Whether this would be the Fed Funds rate or repo rate, don't really know or care... but I assume that's what you mean by borrowing rate. The rate at which banks can access funds.

It's just that historically those are very close to the t-bill.... but not always.
I'm still unconvinced. I claim that the financing rate for a 3 month futures contract must be the 3-month borrowing rate, not the overnight rate. That's what actually allows risk-free arbitrage. Would you agree?

get_g0ing
Posts: 548
Joined: Sat Dec 09, 2017 11:09 am

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

Post by get_g0ing » Sun Oct 06, 2019 4:55 pm

HEDGEFUNDIE wrote:
Sun Oct 06, 2019 2:55 pm
Hi Hedgefundie,

Just a minor suggestion, in Part I you had a post where you addressed the common questions that came up - that was very helpful. Wondering if you could do that again for part II. I think that'll help people who are just joining.

This has been a great learning thread, thanks for starting this strategy :beer
Last edited by get_g0ing on Sun Oct 06, 2019 4:56 pm, edited 1 time in total.

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 4:56 pm

305pelusa wrote:
Sun Oct 06, 2019 4:12 pm
rascott wrote:
Sun Oct 06, 2019 4:05 pm
305pelusa wrote:
Sun Oct 06, 2019 3:52 pm
rascott wrote:
Sun Oct 06, 2019 3:40 pm
305pelusa wrote:
Sun Oct 06, 2019 3:29 pm


Arbitrage requires that futures have a financing rate at the borrowing rate. Why does the borrowing rate have to be the 3 month treasury rate or RFR? I don't see how that logic follows.
Thanks
If the financing rates on futures were higher than the risk free rate.... arbitragers would buy the underlying asset and sell the future contract..... making risk free returns above the risk free market rate over the 3 month contract period.

In practice it may well vary from that from time to time by a bit.... but never is going to be too far off the 3 month bill rate unless something really wacky is going on.
Let's say the financing rate of futures was 1.8%, the borrowing rate was 1.8% (the two I claim must be equal) and the 3 month treasury was 1.5%. Please walk me through the numbers as to how an arbitreur can make a riskless as profit here please. Thanks

You are correct that it wouldn't be the t bill rate.... but rather the overnight borrowing rate for banks. Whether this would be the Fed Funds rate or repo rate, don't really know or care... but I assume that's what you mean by borrowing rate. The rate at which banks can access funds.

It's just that historically those are very close to the t-bill.... but not always.
I'm still unconvinced. I claim that the financing rate for a 3 month futures contract must be the 3-month borrowing rate, not the overnight rate. That's what actually allows risk-free arbitrage. Would you agree?

Why would it need to be 3 month rate? It's only 3 months at the very beginning.... and then drops daily. Pls they are cash settled daily.... so the overnight rate is the applicable one, in my view.

I read a bunch of papers from CME on this a few months back, and came away comfortable in that the implied repo rate tracks fairly close to the overnight repo rate. Also, there have been several studies that I saw that tested the Treasury futures market. Showing the long- term returns of either 1) holding the underlying bond vs 2) holding the futures contract and investing all the remaining funds in t-bills. The returns were basically identical.... implying to me that the 3 month T bill rate is a good proxy for the implied repo rates of the Treasury futures market.

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305pelusa
Posts: 906
Joined: Fri Nov 16, 2018 10:20 pm

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

Post by 305pelusa » Sun Oct 06, 2019 5:35 pm

rascott wrote:
Sun Oct 06, 2019 4:56 pm
Why would it need to be 3 month rate? It's only 3 months at the very beginning.... and then drops daily. Pls they are cash settled daily.... so the overnight rate is the applicable one, in my view.
That's because the mispricing of the future contract's implied rate is not assured to reverse over a day; but it is sure to reverse by expiration.

In other words, if the implied rate of the contract is 2.1%, you can borrow overnight at 1.8% and the contract expires in 3 months, it's not actually certain that you'd make a profit by entering and exiting the position over a day. The "implied rate" of the future takes effect over the life of the contract because it's only at the end of the contract that the contract must be worth exactly what the underlying is worth.

Before contract expiration, the contract and the underlying can actually move differently. Similar to how a bond can trade above or below par. It is only once expiration is close that the contract will cost exactly what the underlying does. That's where the arbitrage comes in.

We have 2 and a half months before your December contract expires. So given the above, if you had to guess, what do you think will be closer to the financing cost: The overnight rate or the 3 month rate?
rascott wrote:
Sun Oct 06, 2019 4:56 pm

I read a bunch of papers from CME on this a few months back, and came away comfortable in that the implied repo rate tracks fairly close to the overnight repo rate. Also, there have been several studies that I saw that tested the Treasury futures market. Showing the long- term returns of either 1) holding the underlying bond vs 2) holding the futures contract and investing all the remaining funds in t-bills. The returns were basically identical.... implying to me that the 3 month T bill rate is a good proxy for the implied repo rates of the Treasury futures market.
I'd love to read some of those if you find the time to link them.

Either way, to be blunt, I don't care at all what the financing rate was historically. I don't care what the rate was a decade ago. I only care what it is today.

Thankfully, my previous posts are just the intuition/logic. It's possible (and really easy actually) to calculate the implied rate of future contracts today. I'll save you the trouble; it's 2.1%, identical to the 3 month LIBOR.

It is most definitely NOT the 1.71% (the RFR).

rascott
Posts: 1004
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Sun Oct 06, 2019 5:53 pm

305pelusa wrote:
Sun Oct 06, 2019 5:35 pm
rascott wrote:
Sun Oct 06, 2019 4:56 pm
Why would it need to be 3 month rate? It's only 3 months at the very beginning.... and then drops daily. Pls they are cash settled daily.... so the overnight rate is the applicable one, in my view.
That's because the mispricing of the future contract's implied rate is not assured to reverse over a day; but it is sure to reverse by expiration.

In other words, if the implied rate of the contract is 2.1%, you can borrow overnight at 1.8% and the contract expires in 3 months, it's not actually certain that you'd make a profit by entering and exiting the position over a day. The "implied rate" of the future takes effect over the life of the contract because it's only at the end of the contract that the contract must be worth exactly what the underlying is worth.

Before contract expiration, the contract and the underlying can actually move differently. Similar to how a bond can trade above or below par. It is only once expiration is close that the contract will cost exactly what the underlying does. That's where the arbitrage comes in.

We have 2 and a half months before your December contract expires. So given the above, if you had to guess, what do you think will be closer to the financing cost: The overnight rate or the 3 month rate?
rascott wrote:
Sun Oct 06, 2019 4:56 pm

I read a bunch of papers from CME on this a few months back, and came away comfortable in that the implied repo rate tracks fairly close to the overnight repo rate. Also, there have been several studies that I saw that tested the Treasury futures market. Showing the long- term returns of either 1) holding the underlying bond vs 2) holding the futures contract and investing all the remaining funds in t-bills. The returns were basically identical.... implying to me that the 3 month T bill rate is a good proxy for the implied repo rates of the Treasury futures market.
I'd love to read some of those if you find the time to link them.

Either way, to be blunt, I don't care at all what the financing rate was historically. I don't care what the rate was a decade ago. I only care what it is today.

Thankfully, my previous posts are just the intuition/logic. It's possible (and really easy actually) to calculate the implied rate of future contracts today. I'll save you the trouble; it's 2.1%, identical to the 3 month LIBOR.

It is most definitely NOT the 1.71% (the RFR).

I suppose it's possible it hasn't caught up with the drop in the FFR.... the drop has only been showing up in the Treasury yield curve within the last few days. It may take longer to catch up, who knows..... but historically the 3 month LIBOR has USUALLY matched the Fed Funds rate.


http://www.fedprimerate.com/usprimerate ... -chart.htm

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305pelusa
Posts: 906
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Sun Oct 06, 2019 6:06 pm

rascott wrote:
Sun Oct 06, 2019 5:53 pm
305pelusa wrote:
Sun Oct 06, 2019 5:35 pm
rascott wrote:
Sun Oct 06, 2019 4:56 pm
Why would it need to be 3 month rate? It's only 3 months at the very beginning.... and then drops daily. Pls they are cash settled daily.... so the overnight rate is the applicable one, in my view.
That's because the mispricing of the future contract's implied rate is not assured to reverse over a day; but it is sure to reverse by expiration.

In other words, if the implied rate of the contract is 2.1%, you can borrow overnight at 1.8% and the contract expires in 3 months, it's not actually certain that you'd make a profit by entering and exiting the position over a day. The "implied rate" of the future takes effect over the life of the contract because it's only at the end of the contract that the contract must be worth exactly what the underlying is worth.

Before contract expiration, the contract and the underlying can actually move differently. Similar to how a bond can trade above or below par. It is only once expiration is close that the contract will cost exactly what the underlying does. That's where the arbitrage comes in.

We have 2 and a half months before your December contract expires. So given the above, if you had to guess, what do you think will be closer to the financing cost: The overnight rate or the 3 month rate?
rascott wrote:
Sun Oct 06, 2019 4:56 pm

I read a bunch of papers from CME on this a few months back, and came away comfortable in that the implied repo rate tracks fairly close to the overnight repo rate. Also, there have been several studies that I saw that tested the Treasury futures market. Showing the long- term returns of either 1) holding the underlying bond vs 2) holding the futures contract and investing all the remaining funds in t-bills. The returns were basically identical.... implying to me that the 3 month T bill rate is a good proxy for the implied repo rates of the Treasury futures market.
I'd love to read some of those if you find the time to link them.

Either way, to be blunt, I don't care at all what the financing rate was historically. I don't care what the rate was a decade ago. I only care what it is today.

Thankfully, my previous posts are just the intuition/logic. It's possible (and really easy actually) to calculate the implied rate of future contracts today. I'll save you the trouble; it's 2.1%, identical to the 3 month LIBOR.

It is most definitely NOT the 1.71% (the RFR).

I suppose it's possible it hasn't caught up with the drop in the FFR.... the drop has only been showing up in the Treasury yield curve within the last few days. It may take longer to catch up, who knows..... but historically the 3 month LIBOR has USUALLY matched the Fed Funds rate.


http://www.fedprimerate.com/usprimerate ... -chart.htm
I don't doubt they tend to be similar, historically or otherwise. I'm just making it clear that the financing rate of a futures should be the borrowing rate at the term of the future. If the overnight, T-bill, or anything happens to be that too, that's cool.

Any ways, back to my original question. You're borrowing at 2.1% to invest at 1.5%. Just for the volatility and correlation of the asset.

Out of curiosity, have you calculated what the correlation and/or volatility must be for the above to actually yield a profit? In other words, have you quantified in any way the expected return of this insurance?

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