HEDGEFUNDIE's excellent adventure Part II: The next journey

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drock
Posts: 10
Joined: Sat Mar 23, 2019 4:47 pm

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

Post by drock » Wed Aug 14, 2019 5:20 pm

HEDGEFUNDIE wrote:
Wed Aug 14, 2019 10:55 am
If I knew we were going into a recession I wouldn’t have any UPRO.
Does this mean that you plan to implement some sort of risk management into this strategy? I know it isn't very bogle-like but I think it would be smart to include some sort of risk management in this scheme.

I know this forum is not a big fan of market timing/trend following but I think it could be useful here. I personally plan to explore some type of theme around reducing upro or outright getting out of it based on some factors. I don't have the sources handy, but it has been studied that volatility clusters around the S&p 200 day moving average and increases when below that. We also know that our scheme suffers from volatility drag.

Right now I'm thinking of a rule set that looks something like:

If s&p 500 is below its 200 day moving average for 3 days in the last month of trading (so like 21 trading days) then move to 25/75 upro/tmf

If s&p 500 is below its 200 day moving average for 10 days in the last month of trading then move to 0/100 upro/tmf

I also thought about including some kind of indicator built around unemployment rate moving averages as well. My goal is really to just be out of the equity portion during huge down-turns. I might end up losing out on some gains on the way up and eating some losses on the way down but it will cut off the huge draw-downs like 2008 while still capturing most of the upside.

Regular non-leveraged versions of similar strategies have worked pretty well. One that I have seen is just checking the moving average on the same day every month and if we're below then we swap to 0/100 and check again the next month.

MotoTrojan
Posts: 5871
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Wed Aug 14, 2019 5:29 pm

drock wrote:
Wed Aug 14, 2019 5:20 pm
HEDGEFUNDIE wrote:
Wed Aug 14, 2019 10:55 am
If I knew we were going into a recession I wouldn’t have any UPRO.
Does this mean that you plan to implement some sort of risk management into this strategy? I know it isn't very bogle-like but I think it would be smart to include some sort of risk management in this scheme.

I know this forum is not a big fan of market timing/trend following but I think it could be useful here. I personally plan to explore some type of theme around reducing upro or outright getting out of it based on some factors. I don't have the sources handy, but it has been studied that volatility clusters around the S&p 200 day moving average and increases when below that. We also know that our scheme suffers from volatility drag.

Right now I'm thinking of a rule set that looks something like:

If s&p 500 is below its 200 day moving average for 3 days in the last month of trading (so like 21 trading days) then move to 25/75 upro/tmf

If s&p 500 is below its 200 day moving average for 10 days in the last month of trading then move to 0/100 upro/tmf

I also thought about including some kind of indicator built around unemployment rate moving averages as well. My goal is really to just be out of the equity portion during huge down-turns. I might end up losing out on some gains on the way up and eating some losses on the way down but it will cut off the huge draw-downs like 2008 while still capturing most of the upside.

Regular non-leveraged versions of similar strategies have worked pretty well. One that I have seen is just checking the moving average on the same day every month and if we're below then we swap to 0/100 and check again the next month.
Target volatility strategy did a great job of this in the past but the biggest risk is rising rates and this strategy doesn't help there (it could hurt by increasing weighted exposure to TMF). Nice thing about target volatility is that it works both ways; can reduce downside risk in a prolonged bear, and also can increase risk during more safe/steady market rises.

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

Post by Walkure » Wed Aug 14, 2019 5:35 pm

Lee_WSP wrote:
Wed Aug 14, 2019 5:04 pm
MotoTrojan wrote:
Wed Aug 14, 2019 4:49 pm
butricksaid wrote:
Wed Aug 14, 2019 4:45 pm
because 40/60 was what was initially determined to be appropriate in most market conditions from thorough backtesting.

40/60 was only determined to be appropriate through one market condition, which is all but impossible to persist in the future. 40/60 did not look so hot when you go through a full interest rate cycle (1955-present). 55/45 still had a rough ride but did indeed pay-off. I disagree with your assertion and I think you are the one focusing on too small of timeframes/conditions.
Agreed. The era of rising rates was my chief criticism of the strategy. If rates are rising there is no way TMF is making any money as the leveraged principal losses will devastate the nearly nonexistent dividends the fund pays.
But no one changed to 55/45 because they currently foresee LT rates replicating the upward march of the '55-81 era. And in any event, one of the things I've noticed about fear of that regime making an unheralded return is that the fixation on the obvious losses on the bond side have led folks to discount just how mediocre a period it was for leveraged equities as well.

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

Post by MotoTrojan » Wed Aug 14, 2019 5:42 pm

Walkure wrote:
Wed Aug 14, 2019 5:35 pm
Lee_WSP wrote:
Wed Aug 14, 2019 5:04 pm
MotoTrojan wrote:
Wed Aug 14, 2019 4:49 pm
butricksaid wrote:
Wed Aug 14, 2019 4:45 pm
because 40/60 was what was initially determined to be appropriate in most market conditions from thorough backtesting.

40/60 was only determined to be appropriate through one market condition, which is all but impossible to persist in the future. 40/60 did not look so hot when you go through a full interest rate cycle (1955-present). 55/45 still had a rough ride but did indeed pay-off. I disagree with your assertion and I think you are the one focusing on too small of timeframes/conditions.
Agreed. The era of rising rates was my chief criticism of the strategy. If rates are rising there is no way TMF is making any money as the leveraged principal losses will devastate the nearly nonexistent dividends the fund pays.
But no one changed to 55/45 because they currently foresee LT rates replicating the upward march of the '55-81 era. And in any event, one of the things I've noticed about fear of that regime making an unheralded return is that the fixation on the obvious losses on the bond side have led folks to discount just how mediocre a period it was for leveraged equities as well.
The change to 55/45 was not to avoid 1955-1981, since it still would've been crushed. It was for me at-least to increase the likelihood of getting a premium over the S&P500 assuming long-bonds are flat, and even that is looking like a losing situation (or a marginal win with a LOT of risk).

1955-1982 you still got 7.2% using UPRO rebalanced against CASHZERO quarterly (interestingly using unleveraged 20 year bonds actually did over 1% better at 8.37% CAGR). 55/45 UPRO/TMF was crushed with only 3% CAGR. S&P500 was 9.0%.

drock
Posts: 10
Joined: Sat Mar 23, 2019 4:47 pm

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

Post by drock » Wed Aug 14, 2019 5:43 pm

MotoTrojan wrote:
Wed Aug 14, 2019 5:29 pm
drock wrote:
Wed Aug 14, 2019 5:20 pm
HEDGEFUNDIE wrote:
Wed Aug 14, 2019 10:55 am
If I knew we were going into a recession I wouldn’t have any UPRO.
Does this mean that you plan to implement some sort of risk management into this strategy? I know it isn't very bogle-like but I think it would be smart to include some sort of risk management in this scheme.

I know this forum is not a big fan of market timing/trend following but I think it could be useful here. I personally plan to explore some type of theme around reducing upro or outright getting out of it based on some factors. I don't have the sources handy, but it has been studied that volatility clusters around the S&p 200 day moving average and increases when below that. We also know that our scheme suffers from volatility drag.

Right now I'm thinking of a rule set that looks something like:

If s&p 500 is below its 200 day moving average for 3 days in the last month of trading (so like 21 trading days) then move to 25/75 upro/tmf

If s&p 500 is below its 200 day moving average for 10 days in the last month of trading then move to 0/100 upro/tmf

I also thought about including some kind of indicator built around unemployment rate moving averages as well. My goal is really to just be out of the equity portion during huge down-turns. I might end up losing out on some gains on the way up and eating some losses on the way down but it will cut off the huge draw-downs like 2008 while still capturing most of the upside.

Regular non-leveraged versions of similar strategies have worked pretty well. One that I have seen is just checking the moving average on the same day every month and if we're below then we swap to 0/100 and check again the next month.
Target volatility strategy did a great job of this in the past but the biggest risk is rising rates and this strategy doesn't help there (it could hurt by increasing weighted exposure to TMF). Nice thing about target volatility is that it works both ways; can reduce downside risk in a prolonged bear, and also can increase risk during more safe/steady market rises.
I like the volatility targeting approaches as well. I think I would have to have some kind of upper bound of upro exposure of something like 65-75% because I'd be really apprehensive holding more than that though.

So I think my mods to the plan would be some sort of risk management and swapping from tmf to EDV or something when I feel like rates are going to start rising steadily.

Hydromod
Posts: 199
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Hydromod » Wed Aug 14, 2019 5:48 pm

drock wrote:
Wed Aug 14, 2019 5:20 pm
HEDGEFUNDIE wrote:
Wed Aug 14, 2019 10:55 am
If I knew we were going into a recession I wouldn’t have any UPRO.
Does this mean that you plan to implement some sort of risk management into this strategy? I know it isn't very bogle-like but I think it would be smart to include some sort of risk management in this scheme.

I know this forum is not a big fan of market timing/trend following but I think it could be useful here. I personally plan to explore some type of theme around reducing upro or outright getting out of it based on some factors. I don't have the sources handy, but it has been studied that volatility clusters around the S&p 200 day moving average and increases when below that. We also know that our scheme suffers from volatility drag.

Right now I'm thinking of a rule set that looks something like:

If s&p 500 is below its 200 day moving average for 3 days in the last month of trading (so like 21 trading days) then move to 25/75 upro/tmf

If s&p 500 is below its 200 day moving average for 10 days in the last month of trading then move to 0/100 upro/tmf

I also thought about including some kind of indicator built around unemployment rate moving averages as well. My goal is really to just be out of the equity portion during huge down-turns. I might end up losing out on some gains on the way up and eating some losses on the way down but it will cut off the huge draw-downs like 2008 while still capturing most of the upside.

Regular non-leveraged versions of similar strategies have worked pretty well. One that I have seen is just checking the moving average on the same day every month and if we're below then we swap to 0/100 and check again the next month.
I've been exploring some of this stuff on the viewtopic.php?f=10&t=284955 thread.

It looks the adaptive risk parity approaches that people have discussed add value, and approaches based on the moving average and unemployment index do add further value.

I find that gradually reducing the UPRO risk budget over several months is effective, and have some ideas on getting back in as well.

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

Post by MotoTrojan » Wed Aug 14, 2019 5:50 pm

drock wrote:
Wed Aug 14, 2019 5:43 pm


So I think my mods to the plan would be some sort of risk management and swapping from tmf to EDV or something when I feel like rates are going to start rising steadily.
When you "feel" like rates are going to rise? And if you are so sure, why hold EDV and not TMV?

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

Post by drock » Wed Aug 14, 2019 5:54 pm

MotoTrojan wrote:
Wed Aug 14, 2019 5:50 pm
drock wrote:
Wed Aug 14, 2019 5:43 pm


So I think my mods to the plan would be some sort of risk management and swapping from tmf to EDV or something when I feel like rates are going to start rising steadily.
When you "feel" like rates are going to rise? And if you are so sure, why hold EDV and not TMV?
Its gonna be pretty telegraphed when the Fed is gonna start raising rates.

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

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

Post by MotoTrojan » Wed Aug 14, 2019 5:59 pm

drock wrote:
Wed Aug 14, 2019 5:54 pm
MotoTrojan wrote:
Wed Aug 14, 2019 5:50 pm
drock wrote:
Wed Aug 14, 2019 5:43 pm


So I think my mods to the plan would be some sort of risk management and swapping from tmf to EDV or something when I feel like rates are going to start rising steadily.
When you "feel" like rates are going to rise? And if you are so sure, why hold EDV and not TMV?
Its gonna be pretty telegraphed when the Fed is gonna start raising rates.
Yikes, good luck (the fed doesn't control long rates and even if it did, they'd move as soon as it was telegraphed and before you could act on it).

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

Post by Lee_WSP » Wed Aug 14, 2019 6:17 pm

Walkure wrote:
Wed Aug 14, 2019 5:35 pm
Lee_WSP wrote:
Wed Aug 14, 2019 5:04 pm
MotoTrojan wrote:
Wed Aug 14, 2019 4:49 pm
butricksaid wrote:
Wed Aug 14, 2019 4:45 pm
because 40/60 was what was initially determined to be appropriate in most market conditions from thorough backtesting.

40/60 was only determined to be appropriate through one market condition, which is all but impossible to persist in the future. 40/60 did not look so hot when you go through a full interest rate cycle (1955-present). 55/45 still had a rough ride but did indeed pay-off. I disagree with your assertion and I think you are the one focusing on too small of timeframes/conditions.
Agreed. The era of rising rates was my chief criticism of the strategy. If rates are rising there is no way TMF is making any money as the leveraged principal losses will devastate the nearly nonexistent dividends the fund pays.
But no one changed to 55/45 because they currently foresee LT rates replicating the upward march of the '55-81 era. And in any event, one of the things I've noticed about fear of that regime making an unheralded return is that the fixation on the obvious losses on the bond side have led folks to discount just how mediocre a period it was for leveraged equities as well.
I cannot speak to anyone else, but I was never part of the 60% TMF group to begin with. I'm not utilizing the 55/45 strategy either, however, the 55/45 strategy is a better long term buy & hold strategy than 60/40 because the premise behind 60/40 was flawed.

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

Post by Tyler Aspect » Wed Aug 14, 2019 6:21 pm

drock wrote:
Wed Aug 14, 2019 5:20 pm
HEDGEFUNDIE wrote:
Wed Aug 14, 2019 10:55 am
If I knew we were going into a recession I wouldn’t have any UPRO.
Does this mean that you plan to implement some sort of risk management into this strategy? I know it isn't very bogle-like but I think it would be smart to include some sort of risk management in this scheme.

I know this forum is not a big fan of market timing/trend following but I think it could be useful here. I personally plan to explore some type of theme around reducing upro or outright getting out of it based on some factors. I don't have the sources handy, but it has been studied that volatility clusters around the S&p 200 day moving average and increases when below that. We also know that our scheme suffers from volatility drag.

Right now I'm thinking of a rule set that looks something like:

If s&p 500 is below its 200 day moving average for 3 days in the last month of trading (so like 21 trading days) then move to 25/75 upro/tmf

If s&p 500 is below its 200 day moving average for 10 days in the last month of trading then move to 0/100 upro/tmf

I also thought about including some kind of indicator built around unemployment rate moving averages as well. My goal is really to just be out of the equity portion during huge down-turns. I might end up losing out on some gains on the way up and eating some losses on the way down but it will cut off the huge draw-downs like 2008 while still capturing most of the upside.

Regular non-leveraged versions of similar strategies have worked pretty well. One that I have seen is just checking the moving average on the same day every month and if we're below then we swap to 0/100 and check again the next month.
There is no guarantee that the stock market and long term Treasuries must move in the opposite direction. There could be scenarios that both UPRO and TMF reaches $0 per share. If there are contingency events you might as well move to 80% stock / 20% bond or 60% stock / 40% bond.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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

Post by Gemini » Wed Aug 14, 2019 7:50 pm

Was there a consensus on how often/when to re-balance? I made the switch same day as OP to 55/45 and I am already at 51/48!

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

Post by NMBob » Wed Aug 14, 2019 8:33 pm

deleted
Last edited by NMBob on Wed Aug 14, 2019 8:49 pm, edited 1 time in total.

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

Post by Hydromod » Wed Aug 14, 2019 8:42 pm

Gemini wrote:
Wed Aug 14, 2019 7:50 pm
Was there a consensus on how often/when to re-balance? I made the switch same day as OP to 55/45 and I am already at 51/48!
There were two camps, the monthly and the quarterly. Back tests with the original weighting suggested quarterly by a nose, but there is so much noise from different starting days that it would likely take 5 to 10 years at a minimum to start to tell. No further discussion with the new weights.

I tested bands and didn't see much degradation until absolute bands were larger than 15 to 20 percent.

I think there's a lot of give in selecting rebalancing strategy, so I wouldn't worry too much.

Ymmv

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

Post by Lee_WSP » Wed Aug 14, 2019 8:50 pm

I think we should be biased towards long rebalance due to the high transaction costs.

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

Post by drock » Wed Aug 14, 2019 8:54 pm

Lee_WSP wrote:
Wed Aug 14, 2019 8:50 pm
I think we should be biased towards long rebalance Oreos due to the high transaction costs.
Not only do you have to buy the Oreos but you gotta get plenty of milk to go with them. I like to balance my oreos to about 8 per 1 glass of milk.

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

Post by MotoTrojan » Wed Aug 14, 2019 8:56 pm

Lee_WSP wrote:
Wed Aug 14, 2019 8:50 pm
I think we should be biased towards long rebalance due to the high transaction costs.
+1. Should also help reduce drawdown. Monthly seems to historically and consistently draw deeper. I’m using quarterly but anywhere from there to annually should suffice. If you use contributions to rebalance periodically that helps too.

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

Post by MotoTrojan » Wed Aug 14, 2019 9:02 pm

30 year treasuries below 2% currently. 1st time in history.

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

Post by ginrummy » Wed Aug 14, 2019 11:06 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
I’m in. Since June. Little over 5% of portfolio. Up 13% ish to date. I was 40/60 then moved to 50/50 this past Monday. In IRA.

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

Post by HawkeyePierce » Thu Aug 15, 2019 4:00 am

My transfer to M1 looks like it should be done today so I'll be on board in a day or two once it settles.

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

Post by Forester » Thu Aug 15, 2019 6:15 am

For someone nervous about interest rates, use of TYD & GDXJ

https://www.portfoliovisualizer.com/tes ... total1=100

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

Post by GeraniumLover » Thu Aug 15, 2019 6:35 am

Has anyone posted backtests of the new 55/45 AA? The OP looks like it still features the 40/60 AA.

jaj2276
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jaj2276 » Thu Aug 15, 2019 6:45 am

First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).

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

Post by privatefarmer » Thu Aug 15, 2019 7:19 am

jaj2276 wrote:
Thu Aug 15, 2019 6:45 am
First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).
Thats a naive way to look at it. He hasn’t defaulted from the overall strategy (using LETFs on a balanced portfolio to get higher returns with market like risk). Making minor adjustments as more information comes in just being practical.

jaj2276
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jaj2276 » Thu Aug 15, 2019 7:57 am

privatefarmer wrote:
Thu Aug 15, 2019 7:19 am
jaj2276 wrote:
Thu Aug 15, 2019 6:45 am
First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).
Thats a naive way to look at it. He hasn’t defaulted from the overall strategy (using LETFs on a balanced portfolio to get higher returns with market like risk). Making minor adjustments as more information comes in just being practical.
It might be practical but the logical foundation he used for the original portfolio has changed. He said there was no need for a bull market for treasuries but in fact there is a need for 40/60.

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

Post by NMBob » Thu Aug 15, 2019 8:55 am

i can see why someone would be surprised to see the change. the first post says it is 'market agnostic' ...the first post says 40/60 won't make much, but that is why it is leveraged, and doesn't present a discussion on changing weightings to adjust that return, or adjustment for returns and sharp ratio etc. I don't find in the first post that periodic reviews of any specific factors that will weigh more than others (such as select historical windows of p/e and long interest rates), will be used to change the weighting. that is a pretty significant omission. it appears the change was not made due to anything stated in the first post, such as a methodology for periodic review and specific criteria. the change was made from a bunch of recent posts provided arguments. wonder when the next pile of posts will make that happen again. will there be new, previously unidentified or unfocused on criteria next time?
Last edited by NMBob on Thu Aug 15, 2019 9:14 am, edited 1 time in total.

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

Post by Hydromod » Thu Aug 15, 2019 9:02 am

MotoTrojan wrote:
Wed Aug 14, 2019 9:41 am
ocrtech wrote:
Wed Aug 14, 2019 9:32 am
MoneyMarathon wrote:
Tue Aug 13, 2019 10:00 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:41 pm
These are not two portfolios held separately then added together, they are means of simulating each assets contribution to the portfolio as a whole. If one of them goes up 10x and the other 3x, then the total growth was 30x, not 13x.
Let me try to explain the hand-wavy math I used (but... be warned it might only be more confusing than the original hand waving).

Weighted average rate of returns is a weighted sum of the rate of growth of each investment. Wikipedia page:

https://en.wikipedia.org/wiki/Rate_of_r ... _portfolio

When I set up my little experiment, I calculated a total return (over time) that had an associated CAGR that was tied to a larger amount of capital than what was relevant (e.g., the whole 100% instead of the 40% in UPRO). To get the weighted sum of the rate of growth of each investment, we'd first want to get the CAGR based on each individual smaller amount of capital allocated to the investment. But, if we use these weird, unadjusted whole-portfolio CAGR to get a weighted sum, then the weighted sum: 0.4 * (x / 0.4) + 0.6 * (y / 0.6) = x + y, where x and y are the respective CAGRs of the 40% UPRO/60% CASHZERO and 60% TMF/40% CASHZERO rebalanced portfolios. So the weighted sum for the rate of growth is just x + y of the weird (unadjusted to the actual amount of principal for the individual investment, and instead looking at contribution to the whole portfolio) CAGRs. So expected portfolio CAGR = x + y, with steady growth (and without including any bonus effects from rebalancing negatively correlated investments).

A = P * e ^ (rt) is one expression of the exponential growth formula. And if r = x + y, then:

A = P * e ^ ( (x + y) t) = P * e ^ (x t) * e ^ (y t)

Now if we compute B = P * e ^ (x t) / P = e ^ (x t) and compute C = P * e ^ (y t) / P = e ^ (y t), where B is the total return on cash over the whole time period for the 40% UPRO/60% CASHZERO portfolio and where C is the same thing for 60% TMF/40% CASHZERO, and where P is the original principal, then:

P * B * C = P * e ^ (x t) * e ^ (y t) = P * e ^ ( (x + y) t) = P * e ^ (rt) = A

And to the extent that the observed result is different from P * B * C, that looks like the effect of the 'rebalancing bonus' from negative correlation. Note again that it's larger for the quarterly rebalancing, so the 0.5% CAGR figure that was thrown around does not necessarily apply to quarterly rebalancing. The approximate 0.5% CAGR figure was based on looking at annual rebalancing over the last 32 years. So anyone using quarterly rebalancing may want to include an appropriately larger bonus from rebalancing based on that method.
In some of the work Bernstein did on the rebalancing bonus, he states:

"Since the rebalancing bonus is proportional to the variance of the asset, a doubling of SD results in a quadrupling of variance, and thus of rebalancing benefit."

The 10 year S&P500 (SPY) StdDv is 12.53 and UPro is 38.77. The 10 year LTT (TLT) StdDev is 12.15 and TMF is 38.35. That means the entire portfolio StdDev is roughly triple which should result in roughly 9 times increase in variance. Since it is proportional, wouldn't that mean we would expect the rebalancing bonus for the UPRO/TMF to be in the range of 4.5% CAGR?
Certainly curious to hear more thoughts here. I did a quick study last night looking at periods where TMF was flat (usually 3-5 year periods) and found that a 4-6% CAGR improvement existed for 55/45 UPRO/TMF over 55/45 UPRO/CASHX, so it certainly seems like the rebalancing bonus is larger. Quarterly rebalancing was best but the bonus persisted across other periods. Most of these periods were in the last 2 decades though when apparently the correlation has been most negative. Unfortunately TMF has been on such a tear that it is tough to compare.

From 1955-2002 TMF returned 0.4% CAGR. Using quarterly rebalance, 55/45 UPRO/TMF returned 9.6% with a 76% drawdown while 55/45 UPRO/CASHZERO returned 8.7% with a 68% drawdown, so there was about a 0.5% rebalancing bonus indeed during that period. It seems the bonus is much larger in the last 2 decades.
I did a little thought experiment model last night to look at this a bit more, and I'm still pondering the results. I was comparing different strategies for estimating the rebalancing bonus, with the moving volatility and moving correlation for reference. I almost posted it last night but wanted some pillow time and insight from members here.

The approach is to subtract off a moving-average return from TMF. This keeps the shorter fluctuations essentially the same and gives a zero-return proxy with fluctuations representative of TMF. This can be compared with a null (zero return) cash proxy.

The moving average period should represent the long-term behavior, and one could use the approach to investigate the future behavior with smaller moving returns.

I get a very different response with a 5-year moving average than with a 5-month moving average. As the moving average goes to zero, the behavior moves towards the null case. As the moving-average filter goes to longer durations, (i) TMF is allowed to move over larger ranges and (ii) the returns from the UPRO/detrended-TMF portfolio fluctuate more widely around the returns from the UPRO/NULL portfolio.

To me, this implies that the rebalancing bonus is very dependent on the particular interval being studied.

I have no feel for what an appropriate moving average period is. My first instinct was to use something like five years.

What do folks think would be a fair way of representing a detrended TMF?

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

Post by Lee_WSP » Thu Aug 15, 2019 9:39 am

Hydromod wrote:
Thu Aug 15, 2019 9:02 am

What do folks think would be a fair way of representing a detrended TMF?
Can you do a Monte Carlo simulation changing the expected returns?

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

Post by Hydromod » Thu Aug 15, 2019 9:58 am

Lee_WSP wrote:
Thu Aug 15, 2019 9:39 am
Hydromod wrote:
Thu Aug 15, 2019 9:02 am

What do folks think would be a fair way of representing a detrended TMF?
Can you do a Monte Carlo simulation changing the expected returns?
Do you mean the expected returns for the entire sequence? In other words, take out the overall measured return and substitute a different one sampled from a distribution?

That should be straightforward. I would need input on the replacement distribution though.

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

Post by Lee_WSP » Thu Aug 15, 2019 10:35 am

Hydromod wrote:
Thu Aug 15, 2019 9:58 am
Lee_WSP wrote:
Thu Aug 15, 2019 9:39 am
Hydromod wrote:
Thu Aug 15, 2019 9:02 am

What do folks think would be a fair way of representing a detrended TMF?
Can you do a Monte Carlo simulation changing the expected returns?
Do you mean the expected returns for the entire sequence? In other words, take out the overall measured return and substitute a different one sampled from a distribution?

That should be straightforward. I would need input on the replacement distribution though.
I'm not a math expert, but yes, that is my thinking. Force the model to assume a lower ROR or even a negative ROR.

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

Post by ocrtech » Thu Aug 15, 2019 11:16 am

Hydromod wrote:
Thu Aug 15, 2019 9:02 am
MotoTrojan wrote:
Wed Aug 14, 2019 9:41 am
ocrtech wrote:
Wed Aug 14, 2019 9:32 am
MoneyMarathon wrote:
Tue Aug 13, 2019 10:00 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:41 pm
These are not two portfolios held separately then added together, they are means of simulating each assets contribution to the portfolio as a whole. If one of them goes up 10x and the other 3x, then the total growth was 30x, not 13x.
Let me try to explain the hand-wavy math I used (but... be warned it might only be more confusing than the original hand waving).

Weighted average rate of returns is a weighted sum of the rate of growth of each investment. Wikipedia page:

https://en.wikipedia.org/wiki/Rate_of_r ... _portfolio

When I set up my little experiment, I calculated a total return (over time) that had an associated CAGR that was tied to a larger amount of capital than what was relevant (e.g., the whole 100% instead of the 40% in UPRO). To get the weighted sum of the rate of growth of each investment, we'd first want to get the CAGR based on each individual smaller amount of capital allocated to the investment. But, if we use these weird, unadjusted whole-portfolio CAGR to get a weighted sum, then the weighted sum: 0.4 * (x / 0.4) + 0.6 * (y / 0.6) = x + y, where x and y are the respective CAGRs of the 40% UPRO/60% CASHZERO and 60% TMF/40% CASHZERO rebalanced portfolios. So the weighted sum for the rate of growth is just x + y of the weird (unadjusted to the actual amount of principal for the individual investment, and instead looking at contribution to the whole portfolio) CAGRs. So expected portfolio CAGR = x + y, with steady growth (and without including any bonus effects from rebalancing negatively correlated investments).

A = P * e ^ (rt) is one expression of the exponential growth formula. And if r = x + y, then:

A = P * e ^ ( (x + y) t) = P * e ^ (x t) * e ^ (y t)

Now if we compute B = P * e ^ (x t) / P = e ^ (x t) and compute C = P * e ^ (y t) / P = e ^ (y t), where B is the total return on cash over the whole time period for the 40% UPRO/60% CASHZERO portfolio and where C is the same thing for 60% TMF/40% CASHZERO, and where P is the original principal, then:

P * B * C = P * e ^ (x t) * e ^ (y t) = P * e ^ ( (x + y) t) = P * e ^ (rt) = A

And to the extent that the observed result is different from P * B * C, that looks like the effect of the 'rebalancing bonus' from negative correlation. Note again that it's larger for the quarterly rebalancing, so the 0.5% CAGR figure that was thrown around does not necessarily apply to quarterly rebalancing. The approximate 0.5% CAGR figure was based on looking at annual rebalancing over the last 32 years. So anyone using quarterly rebalancing may want to include an appropriately larger bonus from rebalancing based on that method.
In some of the work Bernstein did on the rebalancing bonus, he states:

"Since the rebalancing bonus is proportional to the variance of the asset, a doubling of SD results in a quadrupling of variance, and thus of rebalancing benefit."

The 10 year S&P500 (SPY) StdDv is 12.53 and UPro is 38.77. The 10 year LTT (TLT) StdDev is 12.15 and TMF is 38.35. That means the entire portfolio StdDev is roughly triple which should result in roughly 9 times increase in variance. Since it is proportional, wouldn't that mean we would expect the rebalancing bonus for the UPRO/TMF to be in the range of 4.5% CAGR?
Certainly curious to hear more thoughts here. I did a quick study last night looking at periods where TMF was flat (usually 3-5 year periods) and found that a 4-6% CAGR improvement existed for 55/45 UPRO/TMF over 55/45 UPRO/CASHX, so it certainly seems like the rebalancing bonus is larger. Quarterly rebalancing was best but the bonus persisted across other periods. Most of these periods were in the last 2 decades though when apparently the correlation has been most negative. Unfortunately TMF has been on such a tear that it is tough to compare.

From 1955-2002 TMF returned 0.4% CAGR. Using quarterly rebalance, 55/45 UPRO/TMF returned 9.6% with a 76% drawdown while 55/45 UPRO/CASHZERO returned 8.7% with a 68% drawdown, so there was about a 0.5% rebalancing bonus indeed during that period. It seems the bonus is much larger in the last 2 decades.
I did a little thought experiment model last night to look at this a bit more, and I'm still pondering the results. I was comparing different strategies for estimating the rebalancing bonus, with the moving volatility and moving correlation for reference. I almost posted it last night but wanted some pillow time and insight from members here.

The approach is to subtract off a moving-average return from TMF. This keeps the shorter fluctuations essentially the same and gives a zero-return proxy with fluctuations representative of TMF. This can be compared with a null (zero return) cash proxy.

The moving average period should represent the long-term behavior, and one could use the approach to investigate the future behavior with smaller moving returns.

I get a very different response with a 5-year moving average than with a 5-month moving average. As the moving average goes to zero, the behavior moves towards the null case. As the moving-average filter goes to longer durations, (i) TMF is allowed to move over larger ranges and (ii) the returns from the UPRO/detrended-TMF portfolio fluctuate more widely around the returns from the UPRO/NULL portfolio.

To me, this implies that the rebalancing bonus is very dependent on the particular interval being studied.

I have no feel for what an appropriate moving average period is. My first instinct was to use something like five years.

What do folks think would be a fair way of representing a detrended TMF?
In one of his papers, Bernstein provided a formula for determining the rebalancing bonus. Here is the link: http://www.efficientfrontier.com/ef/996/rebal.htm

It's pretty straight forward to implement but after doing so I decided it wasn't really providing me any actionable information. What I was really interested in was what is the improvement in the baseline portfolio CAGR as I change aspects of the rebalancing approach. As an example, by switching from linear to exponential weighting of the monthly volatility measurement, I was able to improve CAGR by 0.37% and reduce the max drawdown by 0.49% from the inverse volatility baseline or 3.21% CAGR improvement and 22.62% reduction in drawdown from the OPs current fixed allocation of 55/45.

With that said, if I was looking at substituting a new ETF for one of the current ones, the Bernstein formula would certainly help guide which new ones are likely to be more profitable.

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

Post by MotoTrojan » Thu Aug 15, 2019 11:22 am

Forester wrote:
Thu Aug 15, 2019 6:15 am
For someone nervous about interest rates, use of TYD & GDXJ

https://www.portfoliovisualizer.com/tes ... total1=100
Better to avoid leverage and use EDV.

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

Post by Legitthe » Thu Aug 15, 2019 12:28 pm

jaj2276 wrote:
Thu Aug 15, 2019 7:57 am
privatefarmer wrote:
Thu Aug 15, 2019 7:19 am
jaj2276 wrote:
Thu Aug 15, 2019 6:45 am
First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).
Thats a naive way to look at it. He hasn’t defaulted from the overall strategy (using LETFs on a balanced portfolio to get higher returns with market like risk). Making minor adjustments as more information comes in just being practical.
It might be practical but the logical foundation he used for the original portfolio has changed. He said there was no need for a bull market for treasuries but in fact there is a need for 40/60.
It is practical as OP is recognizing that TMF’s risk is understated. Still the same risk parity balance.

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

Post by sfmurph » Thu Aug 15, 2019 12:28 pm

Lee_WSP wrote:
Wed Aug 14, 2019 6:17 pm
… the 55/45 strategy is a better long term buy & hold strategy than 60/40 because the premise behind 60/40 was flawed.
jaj2276 wrote:
Thu Aug 15, 2019 7:57 am
It might be practical but the logical foundation he used for the original portfolio has changed. He said there was no need for a bull market for treasuries but in fact there is a need for 40/60.
These are the two points that are bugging me. The original 60/40 proportion was derived from the average annual volatility of long term Treasuries and the S&P 500 over the 1955-2018 period. But when someone else teased out the impact of the Treasuries bull market, it turned out that much of the pop came from that. With rates now below 2%, that doesn't seem likely to be reproduced.
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
Doesn't this strategy rely on a bond bull market?
No. Let’s not forget that this strategy levers up both stocks and bonds. During rising interest rates (when bonds fall), it turns out that stocks tend to go up.
So it seems that the answer to this question is actually "Yes." So far, so good.

I don't understand what the logical foundation for a 45/55 proportion is. I guess it's not average annual volatility, at least not over 1955-2018, but what is it? When I saw the first post, it had a lot of charts backtesting and with monte carlo simulations. The new update points to a table of CAGR of shorter, "similar," more recent periods, but none with the 45/55 proportion.

I'm still very interested and intrigued in the three principles of the strategy: diversification, risk parity and leverage. And using TMF and UPRO/SPXL to easily get that non-correlated diversification and leverage is great. But now, I don't think that the

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

Post by JBeck » Thu Aug 15, 2019 12:35 pm

sfmurph wrote:
Thu Aug 15, 2019 12:28 pm
when someone else teased out the impact of the Treasuries bull market, it turned out that much of the pop came from that. With rates now below 2%, that doesn't seem likely to be reproduced.
I wonder if Hedgefundie would have started this excellent adventure to begin with if this was more apparent up front?

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

Post by MotoTrojan » Thu Aug 15, 2019 12:45 pm

Legitthe wrote:
Thu Aug 15, 2019 12:28 pm
jaj2276 wrote:
Thu Aug 15, 2019 7:57 am
privatefarmer wrote:
Thu Aug 15, 2019 7:19 am
jaj2276 wrote:
Thu Aug 15, 2019 6:45 am
First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).
Thats a naive way to look at it. He hasn’t defaulted from the overall strategy (using LETFs on a balanced portfolio to get higher returns with market like risk). Making minor adjustments as more information comes in just being practical.
It might be practical but the logical foundation he used for the original portfolio has changed. He said there was no need for a bull market for treasuries but in fact there is a need for 40/60.
It is practical as OP is recognizing that TMF’s risk is understated. Still the same risk parity balance.
I disagree that a thorough risk parity balance was done, but more so an optimization on return/overall risk through a period where rates went through a cycle of rising/lowering. 55/45 is a bit of a peak in terms of return vs. drawdown; you get a bit more return at higher equity ratios but the ride is wild.

I am really liking the looks of 43/57 UPRO/EDV (same ratio of equity to treasury exposure as 55/45 UPRO/TMF). Through the full 1955-2018 cycle it would've had an 11.67% CAGR compared to 12.99% for 55/45 and 10.08% for the S&P500. I feel I could hold this more comfortable, rather I could continue to contribute to it more comfortably. It has performance quite similar to PSLDX as well, but with a methodology I agree with more (no credit risk on the bond side). I would have no problem making my entire US large-cap allocation in this, if my 401k offered it.

I may spin off something along those lines for future contributions, and keep some fun money in 55/45 so I feel the connection to y'all still :sharebeer .

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

Post by HEDGEFUNDIE » Thu Aug 15, 2019 12:46 pm

JBeck wrote:
Thu Aug 15, 2019 12:35 pm
sfmurph wrote:
Thu Aug 15, 2019 12:28 pm
when someone else teased out the impact of the Treasuries bull market, it turned out that much of the pop came from that. With rates now below 2%, that doesn't seem likely to be reproduced.
I wonder if Hedgefundie would have started this excellent adventure to begin with if this was more apparent up front?
If I had not, I would be 50k poorer today.

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

Post by privatefarmer » Thu Aug 15, 2019 12:54 pm

HEDGEFUNDIE wrote:
Thu Aug 15, 2019 12:46 pm
JBeck wrote:
Thu Aug 15, 2019 12:35 pm
sfmurph wrote:
Thu Aug 15, 2019 12:28 pm
when someone else teased out the impact of the Treasuries bull market, it turned out that much of the pop came from that. With rates now below 2%, that doesn't seem likely to be reproduced.
I wonder if Hedgefundie would have started this excellent adventure to begin with if this was more apparent up front?
If I had not, I would be 50k poorer today.
And I’d be multiples of that poorer (thanks HEDGEFUNDIE!!)

There’s a new episode of “money for the rest of us” podcast covering negative bond yields. Great listen for anyone interested. David does an excellent job of breaking down why yields would go negative.

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

Post by schismal » Thu Aug 15, 2019 12:57 pm

MotoTrojan wrote:
Thu Aug 15, 2019 12:45 pm
I disagree that a thorough risk parity balance was done, but more so an optimization on return/overall risk through a period where rates went through a cycle of rising/lowering. 55/45 is a bit of a peak in terms of return vs. drawdown; you get a bit more return at higher equity ratios but the ride is wild.
Risk parity from the time LTT yields hit 2% through today is 50/50. It's a limited window of ~7 years, yes, but 55/45 actually isn't that far off.

Now, if anyone wants to simulate the returns from 1934-1955, that might be interesting.

Image

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

Post by HomerJ » Thu Aug 15, 2019 1:03 pm

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

There's also the risk of not having enough to retire. That's a risk whose medicine is to increase the savings rate, but what if we've got no more expenses to cut?
Make more money.

Or find expenses to cut (I don't believe hardly anyone who says "There are no more expenses we can cut").

That's how responsible life works. If you only make so much, you only get to spend so much (less)

If you can't save enough to retire with a plain old 60/40 portfolio, then you're spending too much.

The answer isn't "Find some new plan on the Internet that will guarantee me 20% returns a year for next 30 years"

It's fine that people are experimenting with this "excellent adventure" with their play money, but no one should have all their money invested in this plan because they need 20% returns since "there is just no way to cut expenses".
The J stands for Jay

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

Post by Kevin M » Thu Aug 15, 2019 1:39 pm

MoneyMarathon wrote:
Tue Aug 13, 2019 10:00 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:41 pm
These are not two portfolios held separately then added together, they are means of simulating each assets contribution to the portfolio as a whole. If one of them goes up 10x and the other 3x, then the total growth was 30x, not 13x.
Let me try to explain the hand-wavy math I used (but... be warned it might only be more confusing than the original hand waving).

Weighted average rate of returns is a weighted sum of the rate of growth of each investment. Wikipedia page:

https://en.wikipedia.org/wiki/Rate_of_r ... _portfolio

When I set up my little experiment, I calculated a total return (over time) that had an associated CAGR that was tied to a larger amount of capital than what was relevant (e.g., the whole 100% instead of the 40% in UPRO). To get the weighted sum of the rate of growth of each investment, we'd first want to get the CAGR based on each individual smaller amount of capital allocated to the investment. But, if we use these weird, unadjusted whole-portfolio CAGR to get a weighted sum, then the weighted sum: 0.4 * (x / 0.4) + 0.6 * (y / 0.6) = x + y, where x and y are the respective CAGRs of the 40% UPRO/60% CASHZERO and 60% TMF/40% CASHZERO rebalanced portfolios. So the weighted sum for the rate of growth is just x + y of the weird (unadjusted to the actual amount of principal for the individual investment, and instead looking at contribution to the whole portfolio) CAGRs. So expected portfolio CAGR = x + y, with steady growth (and without including any bonus effects from rebalancing negatively correlated investments).

A = P * e ^ (rt) is one expression of the exponential growth formula. And if r = x + y, then:

A = P * e ^ ( (x + y) t) = P * e ^ (x t) * e ^ (y t)

Now if we compute B = P * e ^ (x t) / P = e ^ (x t) and compute C = P * e ^ (y t) / P = e ^ (y t), where B is the total return on cash over the whole time period for the 40% UPRO/60% CASHZERO portfolio and where C is the same thing for 60% TMF/40% CASHZERO, and where P is the original principal, then:

P * B * C = P * e ^ (x t) * e ^ (y t) = P * e ^ ( (x + y) t) = P * e ^ (rt) = A

And to the extent that the observed result is different from P * B * C, that looks like the effect of the 'rebalancing bonus' from negative correlation. Note again that it's larger for the quarterly rebalancing, so the 0.5% CAGR figure that was thrown around does not necessarily apply to quarterly rebalancing. The approximate 0.5% CAGR figure was based on looking at annual rebalancing over the last 32 years. So anyone using quarterly rebalancing may want to include an appropriately larger bonus from rebalancing based on that method.
This is pretty cool, but there's a slight problem, which is mixing CAGR (compound annual growth rate) and CCGR (compound continuous growth rate).

Start with this:
But, if we use these weird, unadjusted whole-portfolio CAGR to get a weighted sum, then the weighted sum: 0.4 * (x / 0.4) + 0.6 * (y / 0.6) = x + y, where x and y are the respective CAGRs of the 40% UPRO/60% CASHZERO and 60% TMF/40% CASHZERO rebalanced portfolios.
Using numbers from the original example, x = 7.77% and y = 8.07%, so x + y = 15.84%. Using the CAGR formula for 32 years:

Cumulative return factor = (1 + 15.84%)^32 = 110.5.

But the individual cumulative growth factors for 40% upro and 60% tmf are 10.96 and 11.98 respectively, and 10.96 * 11.98 = 131.4 (slight differences from original example because I start with the CAGR numbers rounded to 2 decimal places, rather than the return factors).

I had already worked out the portfolio weighting math, and calculated the 110.5 value, so I PM'd MoneyMarathon about the discrepancy with the calculated value of 131.X, and MM kindly PM'd me the derivation before posting it in the thread.

To resolve this discrepancy, let's calculate CCGR for growth factors 11.98 and 10.96 for 32 years:

CCGRu = LN(11.98)/32 = 7.48%

CCGRt = LN(10.96)/32 = 7.76%

These are of course slightly smaller than CAGR values, since continuous compounding results in larger cumulative growth for a given growth rate. Using the derived approach, we add these to get 15.24% as the weighted CCGR, and:

e^(rt) = e^(15.24% * 32) = 131.4

This verifies the derivation; i.e., e^(CCGR * t) is the product of the cumulative growth factors, 10.96 * 11.98 = 131.4.

But again, multiplying the individual growth factors does not give the correct growth factor for annual compounding. To get this, simply calculate:

(1 + x + y)^t

Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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

Post by Lee_WSP » Thu Aug 15, 2019 2:23 pm

jaj2276 wrote:
Thu Aug 15, 2019 7:57 am
privatefarmer wrote:
Thu Aug 15, 2019 7:19 am
jaj2276 wrote:
Thu Aug 15, 2019 6:45 am
First journey was supposed to last somewhere between 20 and 30 years. It lasted approximately 6 months. Let's see how long this next journey lasts (I'm in for 50% 40/60, 25% 16-vol, 25% Adaptive Allocation).
Thats a naive way to look at it. He hasn’t defaulted from the overall strategy (using LETFs on a balanced portfolio to get higher returns with market like risk). Making minor adjustments as more information comes in just being practical.
It might be practical but the logical foundation he used for the original portfolio has changed. He said there was no need for a bull market for treasuries but in fact there is a need for 40/60.
I think holding people to original positions is a flawed position to take. How can we progress? Sticking to original theses is not how science works.

Buy & hold was not Jack Bogle's original hypothesis.

If you're criticism is leveled at the speed at which the change was made, I can understand. However, to be fair to OP, he created the strategy in a vacuum without the strong back and forth this discussion has provided which enabled new information for OP to discover.

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

Post by MotoTrojan » Thu Aug 15, 2019 2:30 pm

Kevin M wrote:
Thu Aug 15, 2019 1:39 pm


Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
So it sounds like the rebalancing bonus is quite a bit bigger than 0.5%.

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

Post by MotoTrojan » Thu Aug 15, 2019 2:31 pm

schismal wrote:
Thu Aug 15, 2019 12:57 pm
MotoTrojan wrote:
Thu Aug 15, 2019 12:45 pm
I disagree that a thorough risk parity balance was done, but more so an optimization on return/overall risk through a period where rates went through a cycle of rising/lowering. 55/45 is a bit of a peak in terms of return vs. drawdown; you get a bit more return at higher equity ratios but the ride is wild.
Risk parity from the time LTT yields hit 2% through today is 50/50. It's a limited window of ~7 years, yes, but 55/45 actually isn't that far off.

I don't think it is fair to use a cycle that only includes a bull market with very little market distress, but I agree it isn't far off.

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

Post by Lee_WSP » Thu Aug 15, 2019 2:36 pm

MotoTrojan wrote:
Thu Aug 15, 2019 2:30 pm
Kevin M wrote:
Thu Aug 15, 2019 1:39 pm


Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
So it sounds like the rebalancing bonus is quite a bit bigger than 0.5%.
Can someone explain to me how we know with something approaching certainty that rebalancing bonuses isn't anything more than random happenstance? Is there a way to model this without using historical information?

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Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Thu Aug 15, 2019 2:49 pm

Lee_WSP wrote:
Thu Aug 15, 2019 2:36 pm
MotoTrojan wrote:
Thu Aug 15, 2019 2:30 pm
Kevin M wrote:
Thu Aug 15, 2019 1:39 pm


Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
So it sounds like the rebalancing bonus is quite a bit bigger than 0.5%.
Can someone explain to me how we know with something approaching certainty that rebalancing bonuses isn't anything more than random happenstance? Is there a way to model this without using historical information?
Isn't rebalancing bonus the whole premise of risk-parity? When one asset falls, the other has a high probability of rising, thus reducing overall volatility and improving overall returns.

Lee_WSP
Posts: 824
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

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

Post by Lee_WSP » Thu Aug 15, 2019 2:56 pm

MotoTrojan wrote:
Thu Aug 15, 2019 2:49 pm
Lee_WSP wrote:
Thu Aug 15, 2019 2:36 pm
MotoTrojan wrote:
Thu Aug 15, 2019 2:30 pm
Kevin M wrote:
Thu Aug 15, 2019 1:39 pm


Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
So it sounds like the rebalancing bonus is quite a bit bigger than 0.5%.
Can someone explain to me how we know with something approaching certainty that rebalancing bonuses isn't anything more than random happenstance? Is there a way to model this without using historical information?
Isn't rebalancing bonus the whole premise of risk-parity? When one asset falls, the other has a high probability of rising, thus reducing overall volatility and improving overall returns.
I'm not well versed in risk parity, but why does risk parity require you to rebalance at all? If both assets revert to the mean eventually, they'll rebalance themselves. Only minimal tweaking would be necessary per year or every other year to maintain the parity.

MotoTrojan
Posts: 5871
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Thu Aug 15, 2019 2:59 pm

Lee_WSP wrote:
Thu Aug 15, 2019 2:56 pm
MotoTrojan wrote:
Thu Aug 15, 2019 2:49 pm
Lee_WSP wrote:
Thu Aug 15, 2019 2:36 pm
MotoTrojan wrote:
Thu Aug 15, 2019 2:30 pm
Kevin M wrote:
Thu Aug 15, 2019 1:39 pm


Which as shown above, gives a cumulative growth factor of 110.5.

Kevin
So it sounds like the rebalancing bonus is quite a bit bigger than 0.5%.
Can someone explain to me how we know with something approaching certainty that rebalancing bonuses isn't anything more than random happenstance? Is there a way to model this without using historical information?
Isn't rebalancing bonus the whole premise of risk-parity? When one asset falls, the other has a high probability of rising, thus reducing overall volatility and improving overall returns.
I'm not well versed in risk parity, but why does risk parity require you to rebalance at all? If both assets revert to the mean eventually, they'll rebalance themselves. Only minimal tweaking would be necessary per year or every other year to maintain the parity.
Risk parity says nothing about the return of either asset, only the volatility. Rebalancing is necessary or you will drift away from parity.

Hydromod
Posts: 199
Joined: Tue Mar 26, 2019 10:21 pm

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

Post by Hydromod » Thu Aug 15, 2019 3:05 pm

One of the fundamental underlying assumptions in risk parity is that return is proportional to risk.

Which isn't necessarily such a good assumption with something like gold.

MoneyMarathon
Posts: 556
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon » Thu Aug 15, 2019 3:07 pm

Kevin M wrote:
Thu Aug 15, 2019 1:39 pm
CAGR (compound annual growth rate) and CCGR (compound continuous growth rate).
Kevin M wrote:
Thu Aug 15, 2019 1:39 pm
To resolve this discrepancy, let's calculate CCGR for growth factors 11.98 and 10.96 for 32 years:

CCGRu = LN(11.98)/32 = 7.48%

CCGRt = LN(10.96)/32 = 7.76%

These are of course slightly smaller than CAGR values, since continuous compounding results in larger cumulative growth for a given growth rate. Using the derived approach, we add these to get 15.24% as the weighted CCGR, and:

e^(rt) = e^(15.24% * 32) = 131.4

This verifies the derivation; i.e., e^(CCGR * t) is the product of the cumulative growth factors, 10.96 * 11.98 = 131.4.

But again, multiplying the individual growth factors does not give the correct growth factor for annual compounding.
Thanks for working this out.

Are you saying that a "compound annual growth rate" is more relevant here than a "compound continuous growth rate"?

If so, why? Why would a continuous growth rate calculation be inapplicable, and an annual growth rate (using the exponent 1/32 for the number of years, applied to the total return, which when raised to the power of 32 again gives the total return) be more applicable?

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