HEDGEFUNDIE's excellent adventure Part II: The next journey

[Steve Reading]

There are forms of leverage that eliminate the path dependency AND eliminate the possibility of total loss. That's known as "uncallable" debt, and it's ideal if you have access to it. Mortgage, HELOCs and deep in the money calls are examples. They are more expensive of course, which demonstrates that the risk of total liquidation is also a compensated risk interestingly enough

You can see lose both your original investment and all of your borrowed money in this scenario. For instance, if you have $100k and borrow $200k @ 6% to get 3x leverage in the stock market with a 300k total investment, and you see a loss like the 1920s when we saw an 80% downturn, then you are left with a 60k investment and a loan payment of $12k (6% x $200,000). If the market doesn't recover quickly, you will eventually lose your original investment and all of your loaned money, for a total loss of $300k initially, plus you'll still need to pay off the $200k loan that you took out (and the interest you pay on that loan will continue to accrue until you pay it off).

In fact, you can see that this scenario would've happened in Simba's worksheet if you took out a loan of $200k @ 6% in 1929. You actually would've survived the initial downturn in the early 1930s, but the market didn't rebound too strongly and you would've run out of money in 1949 (and be left with a 200k loan to still pay off).

With a 3X daily leveraged ETF, we don't have the numbers for this time era because of a lack of daily data, but even if you assume a total loss of principal, you'd come out way ahead ($100k loss of original investment in ETF scenario vs. $300k loss in HELOC scenario along with interest payments on unpaid loan). Another thing to consider about 3X ETFs is that because they deleverage in downturns, they also are borrowing less money in downturns, so they don't get hit with big debt payments when they can't afford them.

Yeah I agree. I never argued otherwise.

The reality is that the LETFs take on an uncompensated risk due to path dependence. That's fine if you argue that other forms of leverage that don't have that have their own unique problems related to other things.

The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.

[Hydromod]

Another possible strategy would be to keep a constant stocks/long term treasuries ratio and adjust the leverage ratio depending on volatility. The range would depend on your chosen stocks/long term treasuries ratio, say between 1x and 1.6x for 80/20. I know people in this thread have talked about adjusting the asset allocation based on volatility, but any thoughts on adjusting the leverage ratio instead? I haven't done any analysis on this idea.

This sounds similar to the Cluster Risk Parity approach. Basically, you cluster similar assets and then do a Risk Parity between the clusters. You then do an equal risk weight allocation between the assets contained in each cluster.

So, in this case, you would cluster the x1 and x3 bond ETFs together and cluster the x1 and x3 s&p500 ETFs together. From there, do an inverse volatility calculation of the two clusters, and then another calculation of how much leverage to apply within each cluster.

I'm currently working on back testing something similar but it involves incorporating international equities into the current mix. I like your idea and am going to add it to my list of ideas to backtest.

I've been mulling over this as well, but haven't quite gotten to it yet. I'm glad I have a thread to pull with "cluster risk parity".

I would have thought that it would make more sense to first do the leverage/risk budget within each cluster, then do the inverse volatility between clusters. What's the rationale for doing it the other way?

Your clusters are dynamic. Assets can move around between clusters or form new ones depending upon the clustering algorithm you use, the parameters you set, and the timeframes being observed. Without knowing what the composition of your clusters are or really how many exist, I'm not sure how you could assign a risk budget to them in advance.

With regards to x1 and x3 ETFs for bonds and S&P500, I would actually expect each of them to be in separate cluster giving you a total of four. However, since the goal is to optimize risk (leverage) as a function of both CAGR and Sharpe, it seemed to me that artificially clustering bond funds together and S&P500 funds together made the most sense. It will be interesting to see whether the backtesting shows this to be true and what if any value it actually adds.

I was more thinking along the lines of two clusters, 3x and 1x. These are risk balanced internally, balancing volatility. Then sliding between the two clusters according to the amount of leverage you want. We need to check it out.

[Lee_WSP]

The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.

Would your criticism change if the expense ratio was 50% lower?

[Steve Reading]

The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.

Would your criticism change if the expense ratio was 50% lower?

That would certainly be a big reduction. I think I would probably complain a bit on the expense ratio until it was around 0.25. Below that, I'm not sure the expense ratio would really make much of a difference either way. An expense of 0.5% is still a little steep in my opinion but certainly not terrible. 1% is rather high in my opinion.

[Lee_WSP]

The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.

Would your criticism change if the expense ratio was 50% lower?

That would certainly be a big reduction. I think I would probably complain a bit on the expense ratio until it was around 0.25. Below that, I'm not sure the expense ratio would really make much of a difference either way. An expense of 0.5% is still a little steep in my opinion but certainly not terrible. 1% is rather high in my opinion.

PSLDX's expense ratio net of interest is .6%. It is unclear from the prospectus and fact sheet whether UPRO's ER also includes interest.

[Steve Reading]

The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.

Would your criticism change if the expense ratio was 50% lower?

That would certainly be a big reduction. I think I would probably complain a bit on the expense ratio until it was around 0.25. Below that, I'm not sure the expense ratio would really make much of a difference either way. An expense of 0.5% is still a little steep in my opinion but certainly not terrible. 1% is rather high in my opinion.

PSLDX's expense ratio net of interest is .6%. It is unclear from the prospectus and fact sheet whether UPRO's ER also includes interest.

I see. So the 0.52% are the borrowing costs? How much leverage/money is it borrowing then? It's not immediately clear to me from the prospectus.

Sorry if it's being asked before.

Also, I noticed they could invest in individual securities with that fund. That would concern me as it adds another uncompensated risk (stock picking). OP's strategy is in fully diversified funds at least.

[MoneyMarathon]

Also, I noticed they could invest in individual securities with that fund. That would concern me as it adds another uncompensated risk (stock picking).

There's zero stock picking in PSLDX.

There is, however, plenty of bond picking.

[ocrtech]

I was more thinking along the lines of two clusters, 3x and 1x. These are risk balanced internally, balancing volatility. Then sliding between the two clusters according to the amount of leverage you want. We need to check it out.

Interesting approach! Are you planning on backtesting it?

[Steve Reading]

Also, I noticed they could invest in individual securities with that fund. That would concern me as it adds another uncompensated risk (stock picking).

There's zero stock picking in PSLDX.

There is, however, plenty of bond picking.

Then I am confused by this sentence in the prospectus:
"Though the Fund does not normally invest directly in S&P 500 Index
securities, when S&P 500 Index derivatives appear to be overvalued relative
to the S&P 500 Index, the Fund may invest all of its assets in a “basket” of
S&P 500 Index stocks."

That seems to imply the fund might purchase a basket of S&P 500 individual stocks. I don't know how large that basket would be, what companies it might be. Seems to me like it's all up to them no?

Also:
"The Fund may also invest up to 10% of its total assets in preferred securities"

That seems to imply that individual preferred stocks could be fair game as well no?

It looks to me like the fund has the autonomy to buy individual stocks or preferred stocks if they deem it is worthwhile.

[Hydromod]

I was more thinking along the lines of two clusters, 3x and 1x. These are risk balanced internally, balancing volatility. Then sliding between the two clusters according to the amount of leverage you want. We need to check it out.

Interesting approach! Are you planning on backtesting it?

It's on my list. I've been fussing with getting together a set of MATLAB tools to be able to run some analyses. The bare bones are nearly ready, and I will be able to get something done soon.

[MoneyMarathon]

Then I am confused by this sentence in the prospectus:
"Though the Fund does not normally invest directly in S&P 500 Index
securities, when S&P 500 Index derivatives appear to be overvalued relative
to the S&P 500 Index, the Fund may invest all of its assets in a “basket” of
S&P 500 Index stocks."

That seems to imply the fund might purchase a basket of S&P 500 individual stocks. I don't know how large that basket would be, what companies it might be. Seems to me like it's all up to them no?

You're overanalyzing and reading into it things that aren't there for some reason.

It says all of its assets, into a basket of S&P 500 index stocks. In order to maintain exposure to the S&P 500. The "stocks" part in "StocksPlus" is about getting passive exposure to the S&P 500. It says nothing about trying to pick better stocks within the S&P 500.

Also:
"The Fund may also invest up to 10% of its total assets in preferred securities"

That seems to imply that individual preferred stocks could be fair game as well no?

Preferred stocks are hybrid instruments, which apparently are part of their fixed income strategy. Yes it's something to be aware of.

It looks to me like the fund has the autonomy to buy individual stocks or preferred stocks if they deem it is worthwhile.

It may be picking some preferred securities with 10% of its assets, in addition to providing passive exposure to the S&P 500.

Beyond that, you're speculating at best. Showing that you have a strong preference to avoid active management entirely. So, avoid PSLDX. Done.

[Steve Reading]

You're overanalyzing and reading into it things that aren't there for some reason.

I read the prospectus, read that individual securities can be purchased to track the index, and claimed I'd be wary of this.

I don't know how you think that's overanalyzing or reading into something that's not there. You seem very defensive. I'm assuming you've put money in this fund ?

[HawkeyePierce]

You're overanalyzing and reading into it things that aren't there for some reason.

I read the prospectus, read that individual securities can be purchased to track the index, and claimed I'd be wary of this.

I don't know how you think that's overanalyzing or reading into something that's not there. You seem very defensive. I'm assuming you've put money in this fund ?

I think his point might be that many prospectuses have carve-outs allowing the fund to deviate from its normal investment objective.

From Vanguard total bond:

All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index

(I am not invested in any PIMCO funds)

[Steve Reading]

You're overanalyzing and reading into it things that aren't there for some reason.

I read the prospectus, read that individual securities can be purchased to track the index, and claimed I'd be wary of this.

I don't know how you think that's overanalyzing or reading into something that's not there. You seem very defensive. I'm assuming you've put money in this fund ?

I think his point might be that many prospectuses have carve-outs allowing the fund to deviate from its normal investment objective.

From Vanguard total bond:

All of the Fund’s investments will be selected through the sampling process, and at least 80% of the Fund’s assets will be invested in bonds held in the Index

(I am not invested in any PIMCO funds)

Yes, I understand most funds have that. I don't have much concern on the VGD index funds as far as this is concerned at this point. But it is a concern every time I look at any new fund. When looking through any prospectus, a big question for me is "what are they letting themselves invest in and how do I feel about this? Is it matching the index well? Etc".

Any ways, we can just drop it.

I'm still wondering how the 0.52% interest charge works and how much money the fund borrows/leverages. It wasn't clear to me from the prospectus.

[dspencer]

I've been a longtime lurker on this forum but this thread has gotten me to finally register. I'd like to thank HEDGEFUNDIE and others for their great ideas and contributions.

I wonder if people have considered optimizing the leverage ratio together with the stocks/long term treasuries ratio. Similar to how the Kelly criterion states that there is an optimal amount of leverage to maximize expected CAGR. This is a good article that talks about the Kelly criterion and a strategy similar to the excellent adventure: https://rhsfinancial.com/2017/06/line-a ... -leverage/. But I'm interested in maximizing both CAGR and Sharpe because just maximizing CAGR leads to a large amount of risk and past performance does not guarantee future returns.

I took the 1955-2018 yearly data from the spreadsheet linked in this thread for SPY and LTT leveraged 1x and 3x, and used Portfolio Visualizer to collect CAGR and Sharpe results for different leverage ratios between 1x and 3x and different asset allocations between a 100/0 to 50/50 stocks/long term treasuries ratio, by adjusting the allocation of SPYYEAR, LTTYEAR, SPY3YEAR, and LTT3YEAR. SPY3YEAR and LTT3YEAR include a 1% expense ratio. The fact that this data includes the earlier time period where bonds performed poorly makes me feel better since LTT rates are currently quite low and I want to take into account the risk of rates rising significantly.

In this plot, the leverage ratio changes by 0.2x between points on the same line. The points on the right are 1x leverage and the points on the left are 3x leverage. We want to be as close to the top right of the plot as possible, and there seems to be a Pareto frontier around 70/30 and 60/40. Past a certain amount of leverage the CAGR actually goes down, but adding a moderate amount of LTT increases the amount of leverage we can use. So if I want to take a little less risk than a 100% SPY portfolio (10.08% CAGR, 1.16 Sharpe) with the chance of higher returns, I could do a 70/30 asset allocation with 1.6x leverage, which has 11.22% CAGR, 1.22 Sharpe.



Personally I'm wary of completely trusting this analysis and I don't want to go too far away from the conventional wisdom of 1x leverage and not too much LTT, especially due to current interest rates. So I'm actually thinking of using 80/20, which gets you most of the way to the Pareto frontier, and a leverage ratio of 1.2x, which has 10.34% CAGR, 1.27 Sharpe. I also want to use total stock market and total international stock market with a 80/20 ratio between US and international stocks. Instead of TMF, I can use EDV and treat it as a 1.5x leveraged TLT, which allows me to decrease the weighted expense ratio as long as I don't need large amounts of leverage. So this portfolio would consist of:

6% UPRO
59% VTI
19% VXUS
16% EDV

Weighted expense ratio is 0.10%. I wonder if this would be safe enough to make up my overall portfolio. It's basically the equivalent of 96% stocks, 24% LTT. Theoretically it's safer than 100% stocks with a better standard deviation and drawdown, but there's always the risk of unknown unknowns.

Another possible strategy would be to keep a constant stocks/long term treasuries ratio and adjust the leverage ratio depending on volatility. The range would depend on your chosen stocks/long term treasuries ratio, say between 1x and 1.6x for 80/20. I know people in this thread have talked about adjusting the asset allocation based on volatility, but any thoughts on adjusting the leverage ratio instead? I haven't done any analysis on this idea.

Thanks for sharing this. I am currently on the "Excellent Adventure" version 1.0 but I am considering moving to a less leveraged version and also increasing my equity allocation slightly. This is definitely a helpful visualization.

[butricksaid]

On the topic of using EDV vs. TMF:

• while TMF has a high expense ratio, doesn't the fact that it provide 3x of TLT (not quite 3x of EDV) offsetting that cost?
• wouldn't holding UPRO/EDV means you have to lower your exposure to UPRO to maintain the same amount of risk given that you are now using leveraged equities with unleveraged LTT?
• someone in Part 1 said that TMF is not necessarily a safe store of value but that it can be the half that generates substantial returns as well (due to low correlation with equities) so aren't you getting lower returns for similar risk if you are using EDV?

[MotoTrojan]

On the topic of using EDV vs. TMF:

• while TMF has a high expense ratio, doesn't the fact that it provide 3x of TLT (not quite 3x of EDV) offsetting that cost?
• wouldn't holding UPRO/EDV means you have to lower your exposure to UPRO to maintain the same amount of risk given that you are now using leveraged equities with unleveraged LTT?
• someone in Part 1 said that TMF is not necessarily a safe store of value but that it can be the half that generates substantial returns as well (due to low correlation with equities) so aren't you getting lower returns for similar risk if you are using EDV?

Yes it is less duration exposure, hence why I am using 43/57 UPRO/EDV to replicate the 55/45 UPRO/TMF ratio. That doesn't mean it'll have lower returns, time will tell. From 1955-present it about split the difference between 100% S&P500 and 55/45 UPRO/TMF. From 1982-present it yielded 17% compared to the 55/45's 20% CAGR.

TMF is getting 3x TLT income return but it is also paying 2x interest via roughly the 3-month libor; right now that is a wash, so no that is not offsetting EDV's expense ratio boost. When there is a steep yield curve then TMF can certainly make more income than EDV but not as much as you are thinking.

My main reason for liking EDV over TMF is the volatility decay of TMF. For example, since inception UPRO has closer to 5x the total return of the S&P500 while TMF is closer to 1.5x the return of treasuries; treasuries have less price return but still high volatility, and thus volatility decay is more likely in my opinion to hurt you then help you.

The only advantage TMF has is additional duration exposure which only helps you during periods of significant treasury price-gain performance, such as 1982-present, or a sudden spike in treasuries due to equity distress. If you are comfortable deleveraging some, EDV is a clear winner IMHO.

[Steve Reading]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

[Lee_WSP]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

What in the world are you talking about? Only PIMCO is managed. UPRO & TMF follow their respective indexes. Only one or two people are in PIMCO and they are probably totally okay with whatever PIMCO does.

[MotoTrojan]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

What in the world are you talking about? Only PIMCO is managed. UPRO & TMF follow their respective indexes. Only one or two people are in PIMCO and they are probably totally okay with whatever PIMCO does.

Believe 305 is referring to the leverage reset done daily for 3x leveraged funds but I agree it is a moot point, they track the indices quite well and those indices are what my plan is based on. Also I don't think EDV is buying or selling anything today .

[Lee_WSP]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

What in the world are you talking about? Only PIMCO is managed. UPRO & TMF follow their respective indexes. Only one or two people are in PIMCO and they are probably totally okay with whatever PIMCO does.

Believe 305 is referring to the leverage reset done daily for 3x leveraged funds but I agree it is a moot point, they track the indices quite well and those indices are what my plan is based on. Also I don't think EDV is buying or selling anything today .

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

But if he means what you think he means, well, that's the whole point of daily leveraging and rebalancing.

[HEDGEFUNDIE]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

I feel great about it. Capturing the momentum trade and then rebalancing regularly.

[Steve Reading]

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

[dspencer]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

I am 40/60 UPRO/TMF. Psychologically, my reaction to a day like today is amazement and relief that I'm roughly flat on a day like this combined with a fear about what the future could hold. During the brief time I've held this portfolio the consistency with which TMF has balanced big equity losses is remarkable. The contrast with my other accounts (which contain 95%+ of my money) is similarly remarkable.

I'm not convinced it can continue and I am reevaluating whether I want to be in this long term, but so far it has definitely been an Excellent Adventure.

[Lee_WSP]

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

[MotoTrojan]

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

[Lee_WSP]

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

[Steve Reading]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

I am 40/60 UPRO/TMF. Psychologically, my reaction to a day like today is amazement and relief that I'm roughly flat on a day like this combined with a fear about what the future could hold. During the brief time I've held this portfolio the consistency with which TMF has balanced big equity losses is remarkable. The contrast with my other accounts (which contain 95%+ of my money) is similarly remarkable.

I'm not convinced it can continue and I am reevaluating whether I want to be in this long term, but so far it has definitely been an Excellent Adventure.

I'm not asking about the reaction to today. You could've been flat if you had some propertion of VOO and EDV as well.

That portfolio, however, would simply hold its securities steady. What your portfolio will do, however, is that it will now effectively sell a bunch of stocks now that the market has gone down. It will also effectively buy a bunch of treasuries now that their yields have gone down.

I want to know psychologically if that bothers you or not. As someone who is annoyed their paycheck arrives in a week (I'd love if it arrived today and I could buy more stocks), it certainly would bother me to do the exact opposite (sell right after the market drops 2.5%).

[Steve Reading]

If so, his sentence structure suggests our portfolios will be selling stocks & buying treasuries...

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

[HEDGEFUNDIE]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

I am 40/60 UPRO/TMF. Psychologically, my reaction to a day like today is amazement and relief that I'm roughly flat on a day like this combined with a fear about what the future could hold. During the brief time I've held this portfolio the consistency with which TMF has balanced big equity losses is remarkable. The contrast with my other accounts (which contain 95%+ of my money) is similarly remarkable.

I'm not convinced it can continue and I am reevaluating whether I want to be in this long term, but so far it has definitely been an Excellent Adventure.

I'm not asking about the reaction to today. You could've been flat if you had some propertion of VOO and EDV as well.

That portfolio, however, would simply hold its securities steady. What your portfolio will do, however, is that it will now effectively sell a bunch of stocks now that the market has gone down. It will also effectively buy a bunch of treasuries now that their yields have gone down.

I want to know psychologically if that bothers you or not. As someone who is annoyed their paycheck arrives in a week (I'd love if it arrived today and I could buy more stocks), it certainly would bother me to do the exact opposite (sell right after the market drops 2.5%).

I just want to point out that these funds don't actually buy or sell anything in response to market movements.

A swap is simply a contract to exchange money based on index performance. The markets dropped 2.6% today, so ProShares is on the hook to pay its swap counterparties (Citibank, BoA) cash in the amount of 7.8% of the NAV of the fund.

Luckily, ProShares also has UBT, and on a day like today, those banks will be wiring ProShares a bunch of cash on those swaps.

[Steve Reading]

Honest question to people invested. How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

All I'd want to do is the exact opposite. Sell some bonds (which now have lower yields) and purchase some equities. I certainly wouldn't want to buy more bonds at then higher yield and sell my stocks.

Thoughts?

I am 40/60 UPRO/TMF. Psychologically, my reaction to a day like today is amazement and relief that I'm roughly flat on a day like this combined with a fear about what the future could hold. During the brief time I've held this portfolio the consistency with which TMF has balanced big equity losses is remarkable. The contrast with my other accounts (which contain 95%+ of my money) is similarly remarkable.

I'm not convinced it can continue and I am reevaluating whether I want to be in this long term, but so far it has definitely been an Excellent Adventure.

I'm not asking about the reaction to today. You could've been flat if you had some propertion of VOO and EDV as well.

That portfolio, however, would simply hold its securities steady. What your portfolio will do, however, is that it will now effectively sell a bunch of stocks now that the market has gone down. It will also effectively buy a bunch of treasuries now that their yields have gone down.

I want to know psychologically if that bothers you or not. As someone who is annoyed their paycheck arrives in a week (I'd love if it arrived today and I could buy more stocks), it certainly would bother me to do the exact opposite (sell right after the market drops 2.5%).

I just want to point out that these funds don't actually buy or sell anything in response to market movements.

A swap is simply a contract to exchange money based on index performance. The markets dropped 2.6% today, so ProShares is on the hook to pay its swap counterparties (Citibank, BoA) cash in the amount of 7.8% of the NAV of the fund.

No selling occurs but they do reduce the notional size of their swaps. This decreases exposure to the market. I called this "effectively selling" and "effectively buying" since the above felt a little wordy. I admit my wording is a bit sloppy.

[Lee_WSP]

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

I sold some tmf and bought until in one account. Sold at the top. Didn't buy at the bottom, but we'll see Monday.

But a rebalance was in the offing.

I don't see why these are psychologically or functionally any different from any other asset.

[MotoTrojan]

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

I sold some tmf and bought until in one account. Sold at the top. Didn't buy at the bottom, but we'll see Monday.

But a rebalance was in the offing.

I don't see why these are psychologically or functionally any different from any other asset.

No other asset automatically sells low and buys high. Balanced funds do the opposite. The point is still misplaced IMHO, the fund is doing what it was designed to do.

[Lee_WSP]

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

I sold some tmf and bought until in one account. Sold at the top. Didn't buy at the bottom, but we'll see Monday.

But a rebalance was in the offing.

I don't see why these are psychologically or functionally any different from any other asset.

No other asset automatically sells low and buys high. Balanced funds do the opposite. The point is still misplaced IMHO, the fund is doing what it was designed to do.

I don't see it as selling low or buying high. I see it as reduce or increase leverage exposure.

There must be a reason the monthly rebalanced funds didn't work out.

[Walkure]

That's what I suggested and that's what will occur. UPRO will sell some of its positions (I believe credit swaps contracts?) and TMF will buy more exposure to treasuries

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

Well this is pretty much a textbook "livesoft RBD" on a Friday, which if I understand correctly is statistically more likely to be followed by a further drop on Monday, so I'm very happy that this strategy is further trimming stock exposure and extending the bet on 20-yr bonds. Periodically, this strategy will face reversals of momentum and those days will always be mildly painful, but the whole idea is that enough trending days strung together (which is what a trend is) will more than compensate. In any event it isn't behaviorally helpful to fear the reversals in advance just because you know them to be inevitable - and if you cannot tolerate that thought then this isn't the strategy for you.

[Steve Reading]

I sold some tmf and bought until in one account. Sold at the top. Didn't buy at the bottom, but we'll see Monday.

It sounds like you're saying you would prefer option 1 yes? Based on this sentence I'm quoting.

The point is still misplaced IMHO, the fund is doing what it was designed to do.

I agree the funds are doing what they were designed to do.

[Steve Reading]

I don't even care is the answer to your question. It's happened five or six times in the last month. One goes up the other goes down. They both go up. One time they both went down. I felt slightly bad that day. It was the only day my traditional portfolio outperformed.

I don’t think you understand their point. The funds individually do this, it has nothing to do with their interaction.

Your right, I still don't get what he's trying to get at. We all know they reset each day.

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

Well this is pretty much a textbook "livesoft RBD" on a Friday, which if I understand correctly is statistically more likely to be followed by a further drop on Monday, so I'm very happy that this strategy is further trimming stock exposure and extending the bet on 20-yr bonds. Periodically, this strategy will face reversals of momentum and those days will always be mildly painful, but the whole idea is that enough trending days strung together (which is what a trend is) will more than compensate. In any event it isn't behaviorally helpful to fear the reversals in advance just because you know them to be inevitable - and if you cannot tolerate that thought then this isn't the strategy for you.

You're telling me your choice between those 3 depends on the day of the week?

[Lee_WSP]

I sold some tmf and bought until in one account. Sold at the top. Didn't buy at the bottom, but we'll see Monday.

It sounds like you're saying you would prefer option 1 yes? Based on this sentence I'm quoting.

The point is still misplaced IMHO, the fund is doing what it was designed to do.

I agree the funds are doing what they were designed to do.

I love buying low and flipping it for a profit. (That said, I don't actually do it all that often; but I do get a kick out of a good flip.) But that's not what the fund is designed to do so I'm not in the least bit bothered by the fund shedding leverage exposure. If I wanted more UPRO I'd just sell more TMF or scrounge up some couch money.

But honestly, I just invest it all once it's available. I can't time the market and if it wasn't for the already existing need to re-balance, I wouldn't have done anything today.

[ThereAreNoGurus]

The market dropped 2.5% and treasury yields dropped. What would you like to do with this information?
1) Buy some stocks and sell treasuries
2) Do nothing (hold)
3) Sell stocks and buy more treasuries

It's not a trick question. It's just curiosity

Laugh at the Wall St. monkeys and sheep and do nothing.

[Steve Reading]

I love buying low and flipping it for a profit. (That said, I don't actually do it all that often; but I do get a kick out of a good flip.)

Well I'm not asking what brings you joy (who doesn't love good timing). I'm asking what you'd rather do as a rational investor.

But that's not what the fund is designed to do so I'm not in the least bit bothered by the fund shedding leverage exposure.

Moto and you keep making this argument, but it makes no sense. Imagine I invested in a fund with a 10% expense ratio. And you asked me "are you ok with that? You like that?". And my response was "that's what the fund is designed to charge so I'm not the least bothered by it".

This has nothing to do with whether the fund is operating as intended. It has to do with whether you like what it's doing, period.

I can't time the market and if it wasn't for the already existing need to re-balance, I wouldn't have done anything today.

I cannot tell which of the 3 options you prefer. Can you please just tell me? Once again, given that some day the market drops 2.5% (like today), would you prefer to
1) Buy more shares of stocks
2) Keep the same number of shares (do nothing)
3) Sell shares of stocks

I'm asking you as a rational investor. It's not a trick question, just a simple "1, 2, 3" answer.

[Lee_WSP]

Moto and you keep making this argument, but it makes no sense. Imagine I invested in a fund with a 10% expense ratio. And you asked me "are you ok with that? You like that?". And my response was "that's what the fund is designed to charge so I'm not the least bothered by it".

This has nothing to do with whether the fund is operating as intended. It has to do with whether you like what it's doing, period.

Yes, but the high ER assumes there is a lower ER fund that does the same thing but at a lower price. Please point us in the direction of the alternative you propose that is clearly better. And please explain why it is better because lower cost is easy to understand. I'm not sure what the alternative to daily rebalancing is. Yearly definitely won't work, and monthly hasn't worked historically.

[Sic] given that some day the market drops 2.5% (like today), would you prefer to
1) Buy more shares of stocks
2) Keep the same number of shares (do nothing)
3) Sell shares of stocks

I'm asking you as a rational investor. It's not a trick question, just a simple "1, 2, 3" answer.

Do nothing. What else can I do? Unless I'm trying to time the market, I have no cash to do #1 and again, selling would be trying to time the market.

But that's not what the fund is doing. The fund is deleveraging.

You're asking the wrong question. The question should be:

If you saw your margin % drop, would you:
1) Deposit more money into the margin account
2) Do nothing
3) Sell stocks to maintain margin %

[Steve Reading]

Do nothing. What else can I do? Unless I'm trying to time the market, I have no cash to do #1 and again, selling would be trying to time the market.

So you would not sell from your treasuries to buy more stocks, nor would you sell stocks to buy treasuries due to market timing concerns. You'd rather do nothing yes? Like most Bogleheads.
That would be option 2 then.

But that's not what the fund is doing. The fund is deleveraging.

I'm not extremely familiar with UPRO. Could you explain how the fund delevers? Thank you.

You're asking the wrong question. The question should be:

If you saw your margin % drop, would you:
1) Deposit more money into the margin account
2) Do nothing
3) Sell stocks to maintain margin %

I'm not quite sure what your question is asking. What does it mean for the "margin % to drop".

Also, as I write a lot of my comments, I feel like they sound condescending but I truly don't mean them that way. Please don't take them that way. I'm here to learn and satisfy my curiosity as much as the next person.

[Lee_WSP]

Do nothing. What else can I do? Unless I'm trying to time the market, I have no cash to do #1 and again, selling would be trying to time the market.

So you would not sell from your treasuries to buy more stocks, nor would you sell stocks to buy treasuries due to market timing concerns. You'd rather do nothing yes? Like most Bogleheads.
That would be option 2 then.

I will rebalance annually or when I deposit new funds, but I'm not going to be messing around with the portfolio on a daily basis.

But that's not what the fund is doing. The fund is deleveraging.

I'm not extremely familiar with UPRO. Could you explain how the fund delevers? Thank you.

UPRO & TMF seek to maintain a daily 3x leverage of the underlying index. Or, as they put it, return 3x the daily returns of the underlying index.

What happens in practicum is the fund will delever at the end of the day when the index drops and increase leverage when the index goes up. It's pretty much exactly the same as maintaining a constant margin % in a margin account.

You're asking the wrong question. The question should be:

If you saw your margin % drop, would you:
1) Deposit more money into the margin account
2) Do nothing
3) Sell stocks to maintain margin %

I'm not quite sure what your question is asking. What does it mean for the "margin % to drop".

Also, as I write a lot of my comments, I feel like they sound condescending but I truly don't mean them that way. Please don't take them that way. I'm here to learn and satisfy my curiosity as much as the next person.

Fair enough. I wasn't sure if it was the right term. Or if there is a term.

A margin account requires you to keep X% of margin to maintain the loan. If the underlying asset loses value, your collateral decreases and if it falls below the margin requirements, you need to add more collateral. If the underlying asset increases in value, all is good, but you are no longer levered to the same amount.

[Steve Reading]

Do nothing. What else can I do? Unless I'm trying to time the market, I have no cash to do #1 and again, selling would be trying to time the market.

So you would not sell from your treasuries to buy more stocks, nor would you sell stocks to buy treasuries due to market timing concerns. You'd rather do nothing yes? Like most Bogleheads.
That would be option 2 then.

I will rebalance annually or when I deposit new funds, but I'm not going to be messing around with the portfolio on a daily basis.

But that's not what the fund is doing. The fund is deleveraging.

I'm not extremely familiar with UPRO. Could you explain how the fund delevers? Thank you.

UPRO & TMF seek to maintain a daily 3x leverage of the underlying index. Or, as they put it, return 3x the daily returns of the underlying index.

What happens in practicum is the fund will delever at the end of the day when the index drops and increase leverage when the index goes up. It's pretty much exactly the same as maintaining a constant margin % in a margin account.

You're asking the wrong question. The question should be:

If you saw your margin % drop, would you:
1) Deposit more money into the margin account
2) Do nothing
3) Sell stocks to maintain margin %

I'm not quite sure what your question is asking. What does it mean for the "margin % to drop".

Also, as I write a lot of my comments, I feel like they sound condescending but I truly don't mean them that way. Please don't take them that way. I'm here to learn and satisfy my curiosity as much as the next person.

Fair enough. I wasn't sure if it was the right term. Or if there is a term.

A margin account requires you to keep X% of margin to maintain the loan. If the underlying asset loses value, your collateral decreases and if it falls below the margin requirements, you need to add more collateral. If the underlying asset increases in value, all is good, but you are no longer levered to the same amount.

As for the deleveraging question: that's what the fund do. I want to know HOW they delever. Like how that's accomplished. I understand they get exposure with swaps. What do they do with the swaps at end of day to "delever" or "lever" up? Do they do anything at all?

As for the margin, I understand what you mean now. Margin unfortunately has more than one meaning.

So if I do see my margin % drop and I'd like to get it back up, what can I do? Let's say I don't have more cash/securities to put in as collateral.

[Lee_WSP]

As for the deleveraging question: that's what the fund do. I want to know HOW they delever. Like how that's accomplished. I understand they get exposure with swaps. What do they do with the swaps at end of day to "delever" or "lever" up? Do they do anything at all?

As for the margin, I understand what you mean now. Margin unfortunately has more than one meaning.

So if I do see my margin % drop and I'd like to get it back up, what can I do? Let's say I don't have more cash/securities to put in as collateral.

I am not sure. See here for further insight: viewtopic.php?f=10&t=272640

Well, that's kind of my point. If we're all fully invested, how do we even accomplish choice #1?

Are you trying to figure out if the funds are losing money because they are forced to sell the underlying assets? I'm pretty sure they don't work like that.

They also have the inverse funds, so it may just be a matter of them being a "bookie" and equaling out the bulls & bears. But I really don't know. All I know is that historically they have done what they have set out in the prospectus.

[Steve Reading]

Well, that's kind of my point. If we're all fully invested, how do we even accomplish choice #1?

Well if we're fully invested and we see our margin % drop and want to get it back up, the one solution I see is to sell some positions and pay down some of the debt. That would bring your margin % back up right?

Are you trying to figure out if the funds are losing money because they are forced to sell the underlying assets? I'm pretty sure they don't work like that.

Could you explain this one more time? It is possible this is what I think they're doing.

[Lee_WSP]

Selling assets to meet margin would be option 3 though.

I personally do not understand the inner workings of the fund. But I don't see why it's necessarily undesirable to sell/buy assets to maintain a constant leverage percentage.

What I personally think they do is just swap derivatives with the inverse version of their fund.

[Steve Reading]

But I don't see why it's necessarily undesirable to sell/buy assets to maintain a constant leverage percentage.

Ok well let me ask you this. Do you find it undesirable to sell assets after a market downturn? For instance, did you sell any of your equity index funds in your account outside of this excellent adventure today?

[Lee_WSP]

But I don't see why it's necessarily undesirable to sell/buy assets to maintain a constant leverage percentage.

Ok well let me ask you this. Do you find it undesirable to sell assets after a market downturn? For instance, did you sell any of your equity index funds in your account outside of this excellent adventure today?

This is correct, however I'm not running a 3x leveraged ETF.

Now if I was in the position of a leveraged indiviso investor facing a margin call. I'd have to grit my teeth and sell the assets. Which is the position this fund is in.

[Steve Reading]

But I don't see why it's necessarily undesirable to sell/buy assets to maintain a constant leverage percentage.

Ok well let me ask you this. Do you find it undesirable to sell assets after a market downturn? For instance, did you sell any of your equity index funds in your account outside of this excellent adventure today?

This is correct, however I'm not running a 3x leveraged ETF.

Now if I was in the position of a leveraged indiviso investor facing a margin call. I'd have to grit my teeth and sell the assets. Which is the position this fund is in.

Ok so now does my initial question make sense?

How does it feel to know that your funds will be selling stocks today? And will load up by buying more treasuries (which have lower yields)? I'm asking from a purely psychological perspective. Doesn't it bother you? Why/why not?

It sounds like your response is something like "yeah I don't like it at all. But it's what you gotta do if you want to follow this strategy". You wish you didn't have to sell stocks precisely after they go down in price (if anything, perhaps you'd want to buy a few more), but it's a compromise you have to accept. Would that be a fair conclusion?

I just wanted to see if people didn't like it but had to grit their teeth through it (like yourself) or maybe they actually do like it (like OP). That's all.