HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by calcada »

MotoTrojan wrote: Sat Oct 12, 2019 12:11 pm It is all about the ratio of volatility of equity to volatility of treasuries. TMF moves more than EDV. The best way to think about it is that 55/45 UPRO/TMF and 43/57 UPRO/EDV are the same portfolio (same ratio of volatility over the long run) but the 55/45 UPRO/TMF one has ~28% more leverage overall. More leverage does not always mean more return, and it does always mean more risk.

1st I got the long-term volatility of simulated UPRO, TMF, and EDV from 1955-2018 using the Simba spreadsheet. You could do the same using Portfolio Visualizer but I don't have simulated EDV data back since VEDTX inception.

Then I took (volatility_UPRO * 0.55) / (volatility_TMF * 0.45) and set that as my equity to bond volatility ratio. In this case the volatility of the bond fund is a proxy for duration as well.

Then I took (volatility_UPRO * 0.XX) / (volatility_EDV * (1-0.XX)) and iterated on XX until the ratio was equal to the 55/45 UPRO/TMF option.
How did you calculate that 55/45 UPRO/TMF has ~28% more leverage than 43/57 UPRO/EDV? Just by comparing standard deviations of the portfolios?

What did you take as the long-term volatility of simulated UPRO, TMF, and EDV? I used 45.27% for UPRO, 29.79% for TMF and 21.63% for EDV and found the allocation to be 47/53 UPRO/EDV instead of 43/57 UPRO/EDV.

Have you considered the approach of matching the overall portfolio volatility of 55/45 UPRO/TMF with that of UPRO/EDV instead of matching their equity to bond volatility ratios? Assuming 55/45 UPRO/TMF has a long-term volatility of 27%, we get a similar long-term volatility with 60/40 UPRO/EDV. What are your thoughts on this approach and on 60/40 UPRO/EDV?

Is matching the equity to bond volatility ratio the better approach than matching overall volatility?
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

calcada wrote: Sat Oct 17, 2020 3:02 pm
MotoTrojan wrote: Sat Oct 12, 2019 12:11 pm It is all about the ratio of volatility of equity to volatility of treasuries. TMF moves more than EDV. The best way to think about it is that 55/45 UPRO/TMF and 43/57 UPRO/EDV are the same portfolio (same ratio of volatility over the long run) but the 55/45 UPRO/TMF one has ~28% more leverage overall. More leverage does not always mean more return, and it does always mean more risk.

1st I got the long-term volatility of simulated UPRO, TMF, and EDV from 1955-2018 using the Simba spreadsheet. You could do the same using Portfolio Visualizer but I don't have simulated EDV data back since VEDTX inception.

Then I took (volatility_UPRO * 0.55) / (volatility_TMF * 0.45) and set that as my equity to bond volatility ratio. In this case the volatility of the bond fund is a proxy for duration as well.

Then I took (volatility_UPRO * 0.XX) / (volatility_EDV * (1-0.XX)) and iterated on XX until the ratio was equal to the 55/45 UPRO/TMF option.
How did you calculate that 55/45 UPRO/TMF has ~28% more leverage than 43/57 UPRO/EDV? Just by comparing standard deviations of the portfolios?

What did you take as the long-term volatility of simulated UPRO, TMF, and EDV? I used 45.27% for UPRO, 29.79% for TMF and 21.63% for EDV and found the allocation to be 47/53 UPRO/EDV instead of 43/57 UPRO/EDV.

Have you considered the approach of matching the overall portfolio volatility of 55/45 UPRO/TMF with that of UPRO/EDV instead of matching their equity to bond volatility ratios? Assuming 55/45 UPRO/TMF has a long-term volatility of 27%, we get a similar long-term volatility with 60/40 UPRO/EDV. What are your thoughts on this approach and on 60/40 UPRO/EDV?

Is matching the equity to bond volatility ratio the better approach than matching overall volatility?
I don't have the numbers handy but I pulled them from the Simba spreadsheet's annual volatility, I believe from 1955-2018. I don't have the Simba with 3x data handy but multiplying S&P500 and LTT by 3 I am getting 50.2% UPRO, 33.7% TMF, 24.4% EDV which would indeed suggest closer to 47/53 as you noted; maybe I made an error back in the day, or maybe the Simba data for the 3x funds had volatility calculated differently.

I calculated that it is 28% more leverage because it is 28% more equity (55 / 43 = 1.28).

I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

newguy123 wrote: Thu Oct 15, 2020 8:45 pm I have a question about a catastrophe loss risk

Which is more risky

100% in a stock like Apple or Microsoft (buy and hold for 10 years ) with no stop loss

Or

100% in tqqq or upro for 10 years with a 20% stop loss ?


For some reason I am thinking all in one stock is less risky and probably would have better returns . The biggest risk would be bankruptcy for the single stock
Both are seriously risky: if you have a 20% stop loss on a 3x leveraged instrument, you'll trigger the stop loss in less than 3 months. If you buy an individual stock, you can get completely wiped out, and even worse, you are not rewarded for diversifiable risk (i.e. it won't perform any better than an index fund).
thwang99
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by thwang99 »

Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
nehawk87
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by nehawk87 »

thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
calcada
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by calcada »

MotoTrojan wrote: Sat Oct 17, 2020 3:30 pm I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
Thank you for your explanation. May I ask why have you exited the position so quickly? It is supposed to be a 20-30 year adventure after all. The logic behind your proposed 47/53 UPRO/EDV seems solid enough.

Doesn't 55/45 UPRO/TMF have 55% more leverage compared to 47/53 UPRO/EDV given their total allocations of 300% and 194% respectively?

An alternative for those who want to mix in unleveraged treasuries (EDV) instead of replacing TMF entirely could be 53/27/20 UPRO/EDV/TMF (EDV and TMF are proportioned to have the same volatility) or 54/23/23 UPRO/EDV/TMF (EDV and TMF equally proportioned).

By your logic 55/45 UPRO/TMF, 47/53 UPRO/EDV, 53/27/20 UPRO/EDV/TMF and 54/23/23 UPRO/EDV/TMF would all be the same portfolio with the same equity to bond volatility ratio but with varying leverage.

Would you also mind sharing what kind of factor loads you are targeting in your equity portfolio?
calcada
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by calcada »

Has anyone implemented this strategy by including EDV? Care to share your allocations?
thwang99
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by thwang99 »

nehawk87 wrote: Sun Oct 18, 2020 12:40 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
Yeah, shorting the short funds. I should have put them both on one link BTW. :)
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PicassoSparks
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by PicassoSparks »

Mechanically, how will you short the short funds and what are the costs?

Implementation is the devil.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

calcada wrote: Sun Oct 18, 2020 2:04 pm
MotoTrojan wrote: Sat Oct 17, 2020 3:30 pm I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
Thank you for your explanation. May I ask why have you exited the position so quickly? It is supposed to be a 20-30 year adventure after all. The logic behind your proposed 47/53 UPRO/EDV seems solid enough.

Doesn't 55/45 UPRO/TMF have 55% more leverage compared to 47/53 UPRO/EDV given their total allocations of 300% and 194% respectively?

An alternative for those who want to mix in unleveraged treasuries (EDV) instead of replacing TMF entirely could be 53/27/20 UPRO/EDV/TMF (EDV and TMF are proportioned to have the same volatility) or 54/23/23 UPRO/EDV/TMF (EDV and TMF equally proportioned).

By your logic 55/45 UPRO/TMF, 47/53 UPRO/EDV, 53/27/20 UPRO/EDV/TMF and 54/23/23 UPRO/EDV/TMF would all be the same portfolio with the same equity to bond volatility ratio but with varying leverage.

Would you also mind sharing what kind of factor loads you are targeting in your equity portfolio?
I am giving EDV credit for its extra duration relative long-treasuries and calling that leverage. Given that volatility ratio is equivalent I think comparing the allocation of UPRO to get 28% is more intuitive or meaningful than the ratio of leverage on the underlying. I could use say 20x leverage on short term bonds and call that way more leverage, but in reality it’s the same duration exposure as 57% EDV, 45% TMF, etc.

After more research I felt the expected return over the market was far less than the 1982-present backtest would suggest and opted for a different approach. I still think it’s a sound approach but current yields are not very attractive. I do plan to someday add long treasuries and maybe even gold (or TIPS) as diversifiers but stick with equity heavy.

I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.

Target exposure is somewhere in the 0.4+ HML and 0.3+ SmB realm with some quality exposure. Hard to perfectly target that as I use some Alpha Architect funds which don’t regress on FF factors well.

25% S&P500
25% VBR
15% QVAL
25% FNDC
10% IVAL
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

nehawk87 wrote: Sun Oct 18, 2020 12:40 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
Gives you 3x exposure with volatility decay working for you instead of against. In theory it’s way better than using the normal long 3x bull funds as those are subject to vol decay dragging on returns. I’m amazed the costs to short these isn’t too high to make it profitable, if true.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
This thread is so long that inevitably we begin running around in circles. The validity of shorting leveraged ETFs to "harvest" the volatility decay has already been discussed at length about 20 pages ago.

You say that "Shorting instead of going long has been talked about." Did you take a look at viewtopic.php?p=5399207#p5399207 and the subsequent discussion?

I will simply reiterate what I said then that shorting volatility decay is not a free lunch and that shorting SQQQ and rebalancing on a daily basis is the same as going long TQQQ (excluding expenses, borrowing costs).
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

langlands wrote: Sun Oct 18, 2020 10:51 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
This thread is so long that inevitably we begin running around in circles. The validity of shorting leveraged ETFs to "harvest" the volatility decay has already been discussed at length about 20 pages ago.

You say that "Shorting instead of going long has been talked about." Did you take a look at viewtopic.php?p=5399207#p5399207 and the subsequent discussion?

I will simply reiterate what I said then that shorting volatility decay is not a free lunch and that shorting SQQQ and rebalancing on a daily basis is the same as going long TQQQ (excluding expenses, borrowing costs).
+1, there is no free lunch.

The problem is these funds didn't exist during the 2000 and 2008 crashes, so folks can't see how dangerous they are. But we can crudely estimate in PV on a monthly basis for 2008-2009, using a 55/45 allocation to monthly leveraged SPY and TLT.

https://www.portfoliovisualizer.com/bac ... ion3_2=135

What this suggests is that shorting SPXS/TMV would have been much better (-3.83% over the two years) than longing SPXL/TMF (-35.13%). But only if the position was held through a 104% loss. At the bottom of the market, the long strategy would have been down 64% from its original value, while the short strategy would have been completely wiped out. Not to mention that as the market goes down and the short exposure goes up, so do the borrowing costs. Another way to look at this is if TQQQ goes down 10% for five days, you've lost 41% of your investment. If SQQQ goes up 10% for five, you've lost 61%. So during a steady decline, the short position has the potential to lose far more, however because the exposure is increasing rather than decreasing, it will also recover faster. That recovery is an example of the anti-volatility decay benefit, but the tradeoff is more risk. PV doesn't capture that risk since it uses monthly numbers.

Now, maybe the investor has a lot of other assets and is okay with being wiped out, but since maintenance margin is something like 90% for leveraged ETFs, at the worst point she would have only been able to keep a little over 50% of her portfolio in this. And bearing in mind the rest of the portfolio likely would be down too, that's maybe more like 25% of her portfolio that could have safely be held just prior to 2008. If she held more than that, the broker starts closing positions and that kills the excess returns.

In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%). What this looks like in a typical rising market is that the majority of the gains get moved into regular HFEA holdings rather than reinvested, so I won't see anything close to the difference in returns seen in PV backtests. In order to fully realize the difference in CAGR you need to fully reinvest in the short strategy and let it compound.

There are a few unique properties that are nice though, apart from volatility decay working in your favor, mostly taxation related. 1) Little rebalancing is needed with a fixed allocation, since if stocks go up and bonds go down, the short exposure will do the opposite, so it is largely self-balancing. 2) Rebalancing is tax free or even a tax loss harvest because you only ever close positions that lost value, otherwise you're just shorting more. 3) Borrowing fees can be deducted from taxes, so aren't as much of a drag as they might seem. 4) I maintain -100% funds +200% cash, which provides extra liquidity in a pinch, i.e. I can effectively borrow against myself; more aggressive investors might deploy that 200% somewhere other than cash the whole time. 5) When the market goes down and I need to close positions to restore the -100% funds +200% cash ratio, it's a tax loss.
calcada
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by calcada »

MotoTrojan wrote: Sun Oct 18, 2020 9:21 pm I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.
I recalculated with annual volatilities from Simba's LETF spreadsheet. I get 52.72% for UPRO, 39.35% for TMF and 24.06% for EDV. You were indeed correct with the 43/57 UPRO/EDV being equal to 55/45 UPRO/TMF.

I calculate that the following portfolios are all the same with the same equity to bond volatility ratios but with varying leverage. Also copied CAGR and StDev from the spreadsheet (1955-). I hope it makes more sense.

55/45 UPRO/TMF
12.99% 33.58%
43/57 UPRO/EDV
11.67% 26.66%
48/32.3/19.7 UPRO/EDV/TMF (EDV and TMF proportioned to have the same volatility)
12.29% 29.53%
50/25/25 UPRO/EDV/TMF (EDV and TMF equally proportioned)
12.5% 30.54%
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

calcada wrote: Mon Oct 19, 2020 1:58 pm
MotoTrojan wrote: Sun Oct 18, 2020 9:21 pm I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.
I recalculated with annual volatilities from Simba's LETF spreadsheet. I get 52.72% for UPRO, 39.35% for TMF and 24.06% for EDV. You were indeed correct with the 43/57 UPRO/EDV being equal to 55/45 UPRO/TMF.

I calculate that the following portfolios are all the same with the same equity to bond volatility ratios but with varying leverage. Also copied CAGR and StDev from the spreadsheet (1955-). I hope it makes more sense.

55/45 UPRO/TMF
12.99% 33.58%
43/57 UPRO/EDV
11.67% 26.66%
48/32.3/19.7 UPRO/EDV/TMF (EDV and TMF proportioned to have the same volatility)
12.29% 29.53%
50/25/25 UPRO/EDV/TMF (EDV and TMF equally proportioned)
12.5% 30.54%
Those look more in-line. Simplicity is a nice thing to have so I would go big (TMF) or go prudent (EDV).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Maverick3320 »

Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by statefan03 »

Greed is hard to control.
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Crushtheturtle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Crushtheturtle »

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
I'm paraphrasing, but Mr. Bogle is on record as stating that holding leveraged equity is the best strategy, as long as you have someone "to bail you out at the bottom."

I'm not sure if he was aware of these products, so I wouldn't be quick to assume his opinion on their utility.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
Well, most of the posts are people asking whether somebody would reiterate everything that's been said, because they don't want to read it all.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
Holding a diversified basket of US Stocks and Treasury Bonds, in Sharpe-optimal ratios, with the understanding this is a long term, 10-20+ year investment, in the most cost efficient form that is readily accessible to the public right now (it's still expensive, but we still try to optimise for cheapness within this asset class)?
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Semantics wrote: Mon Oct 19, 2020 12:50 am In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%).
How are you selecting strike price and expiration? How long do you hold options and do you let them expire worthless? I tried this a couple of months ago and the difficulty I found was matching the leverage of the two assets - would SPXS and TMV put options bought ATM with the same expiration have roughly the same leverage and volatility? That seemed like an assumption and despite thinking you have roughly a 60/40 or 55/45 or whatever you intended, the actual allocation might be different.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

tomphilly wrote: Tue Oct 20, 2020 9:56 am
Semantics wrote: Mon Oct 19, 2020 12:50 am In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%).
How are you selecting strike price and expiration? How long do you hold options and do you let them expire worthless? I tried this a couple of months ago and the difficulty I found was matching the leverage of the two assets - would SPXS and TMV put options bought ATM with the same expiration have roughly the same leverage and volatility? That seemed like an assumption and despite thinking you have roughly a 60/40 or 55/45 or whatever you intended, the actual allocation might be different.
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Semantics wrote: Tue Oct 20, 2020 1:29 pm
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
That was me. I was selling SQQQ call spreads and buying puts. Lately, I've stopped buying the long calls because I have a bit more confidence in the strategy. My positions right now are essentially short synthetics, with short diagonals/calendars on SQQQ when I am concerned about a crash. So far these hedges have worked perfectly.

Overall, it's been very profitable for me, even with the recent correction in September. QQQ and TQQQ are both below their peaks -- 6% and 20% respectively. Meanwhile, SQQQ is only 7% above its all time low. So far, I have about a 10% profit on the total delta exposure for SQQQ. This is truly an amazing strategy.

As for shorting TMV, I have moved in favor of going long EDV and shorting TMF. I believe TMF will be a dramatic loser in the coming years, as rates rise overall with a lot of choppiness in between. Even if rates fall, long EDV/short TMF is a winner. TMF is a dud going forward.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Thereum wrote: Wed Oct 21, 2020 5:53 pm
Semantics wrote: Tue Oct 20, 2020 1:29 pm
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
That was me. I was selling SQQQ call spreads and buying puts. Lately, I've stopped buying the long calls because I have a bit more confidence in the strategy. My positions right now are essentially short synthetics, with short diagonals/calendars on SQQQ when I am concerned about a crash. So far these hedges have worked perfectly.

Overall, it's been very profitable for me, even with the recent correction in September. QQQ and TQQQ are both below their peaks -- 6% and 20% respectively. Meanwhile, SQQQ is only 7% above its all time low. So far, I have about a 10% profit on the total delta exposure for SQQQ. This is truly an amazing strategy.

As for shorting TMV, I have moved in favor of going long EDV and shorting TMF. I believe TMF will be a dramatic loser in the coming years, as rates rise overall with a lot of choppiness in between. Even if rates fall, long EDV/short TMF is a winner. TMF is a dud going forward.
What ratio do you hold +EDV -TMF in? 1:1? I've definitely soured on TMF in this strategy due to their high borrowing fees and low yields, but if they mostly cancel each other out I guess your profits would come from capturing the high fees and volatility drag, but it looks like TMF is not particularly cheap to borrow (probably for this reason), and the options don't look super liquid.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

I have a question... Why TMF instead of TYD?

TYD has similar correlation to the US market but its drawdowns and ratios are way better.

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

Post by cos »

stockmaster wrote: Thu Oct 22, 2020 12:32 pm I have a question... Why TMF instead of TYD?

TYD has similar correlation to the US market but its drawdowns and ratios are way better.

Image
If TYD is your only holding, then yes, it's absolutely better, but then why are you leveraging intermediate-term US Treasuries? There are far more profitable investments with the same amount of risk (and less leverage and associated costs).

The purpose of TMF in this strategy is to offset precipitous declines in UPRO, and in combination with UPRO, TMF is more efficient at fulfilling this purpose than either TYD or EDV. You want the additional volatility offered by TMF. Hedges like TMF require similar volatility to the asset they're hedging to be effective, and in this case, UPRO is very volatile. Further, the additional volatility offered by TMF allows increasing the allocation to UPRO which is the main driver of returns in this strategy.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

cos wrote: Thu Oct 22, 2020 4:52 pm
stockmaster wrote: Thu Oct 22, 2020 12:32 pm I have a question... Why TMF instead of TYD?

TYD has similar correlation to the US market but its drawdowns and ratios are way better.

Image
If TYD is your only holding, then yes, it's absolutely better, but then why are you leveraging intermediate-term US Treasuries? There are far more profitable investments with the same amount of risk (and less leverage and associated costs).

The purpose of TMF in this strategy is to offset precipitous declines in UPRO, and in combination with UPRO, TMF is more efficient at fulfilling this purpose than either TYD or EDV. You want the additional volatility offered by TMF. Hedges like TMF require similar volatility to the asset they're hedging to be effective, and in this case, UPRO is very volatile. Further, the additional volatility offered by TMF allows increasing the allocation to UPRO which is the main driver of returns in this strategy.
Not always, sorry if this is too pedantic, but it depends on your risk tolerance and expected future returns. If you only hold say 40% UPRO as in the original version of HFEA then using TYD instead of TMF gives better risk-adjusted returns in backtesting.

Projecting forward using Uncorrelated's MVO and currently expected returns, there is no case for TYD at the moment (there's also no case for holding anywhere close to 45% TMF). But that doesn't mean it won't become practical again in the future if yields rise, so I think it's worth discussing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

Semantics wrote: Thu Oct 22, 2020 5:49 pm Not always, sorry if this is too pedantic, but it depends on your risk tolerance and expected future returns. If you only hold say 40% UPRO as in the original version of HFEA then using TYD instead of TMF gives better risk-adjusted returns in backtesting.

Projecting forward using Uncorrelated's MVO and currently expected returns, there is no case for TYD at the moment (there's also no case for holding anywhere close to 45% TMF). But that doesn't mean it won't become practical again in the future if yields rise, so I think it's worth discussing.
Heh, the guy named "Semantics" is apologizing for being pedantic. :wink: I agree with you entirely, but it's important to note the qualifiers I bolded above. TYD can make sense, but only in very specific circumstances. Then again, I guess the same can be said of HFEA itself.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BuffMaltese »

As someone who started their adventure recently, I’m strongly leaning towards just pulling out and waiting until TMF comes back to earth. Maybe once it hits 28. It’s odd that if just feels too risky because of the bond portion. Going to try to short tmf until January too.

What are some temporary alternative strategies to keep a decent amount of money in upro? Buying the dip, spxs calls?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

cos wrote: Thu Oct 22, 2020 4:52 pm If TYD is your only holding, then yes, it's absolutely better, but then why are you leveraging intermediate-term US Treasuries? There are far more profitable investments with the same amount of risk (and less leverage and associated costs).

The purpose of TMF in this strategy is to offset precipitous declines in UPRO, and in combination with UPRO, TMF is more efficient at fulfilling this purpose than either TYD or EDV. You want the additional volatility offered by TMF. Hedges like TMF require similar volatility to the asset they're hedging to be effective, and in this case, UPRO is very volatile. Further, the additional volatility offered by TMF allows increasing the allocation to UPRO which is the main driver of returns in this strategy.
I just checked and what you said seems to be correct, but only in specific percentage allocations.

When UPRO is 55% and Bonds are 45%, TMF is indeed better

Image

But when UPRO is 45%, TYD is better

Image

Do you know why that is? By "better" I'm referring to the Sharpe and Sortino ratios.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

BuffMaltese wrote: Thu Oct 22, 2020 10:18 pm As someone who started their adventure recently, I’m strongly leaning towards just pulling out and waiting until TMF comes back to earth. Maybe once it hits 28. It’s odd that if just feels too risky because of the bond portion. Going to try to short tmf until January too.

What are some temporary alternative strategies to keep a decent amount of money in upro? Buying the dip, spxs calls?
How about: Don't time the market.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

Uncorrelated wrote: Sat Oct 10, 2020 2:58 am You invest to meet your financial goals. Meeting your financial goals is a function of the probability distribution of total portfolio outcomes. By bucketing your portfolio, the optimization processes is compromised and you are guaranteed not to select the portfolio that is best to meet your financial goals.

Bucketing can be seen as a trade-off between simplicity and efficiency. If that's the trade-off you want to make, that's okay. But that doesn't change the underlying math: meeting your financial goals is still a function of your total portfolio. Some models even include your human capital and future social security benefits as part of your portfolio, this can result in large certainty equivalent (risk adjusted) gains.
BTW Uncorrelated I just wanted to say I agree with you here, but I'm not quite sure how best to diversify outside the two-fund original. What do you suggest?
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

Thereum wrote: Wed Oct 21, 2020 5:53 pm
Semantics wrote: Tue Oct 20, 2020 1:29 pm
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
That was me. I was selling SQQQ call spreads and buying puts. Lately, I've stopped buying the long calls because I have a bit more confidence in the strategy. My positions right now are essentially short synthetics, with short diagonals/calendars on SQQQ when I am concerned about a crash. So far these hedges have worked perfectly.

Overall, it's been very profitable for me, even with the recent correction in September. QQQ and TQQQ are both below their peaks -- 6% and 20% respectively. Meanwhile, SQQQ is only 7% above its all time low. So far, I have about a 10% profit on the total delta exposure for SQQQ. This is truly an amazing strategy.

As for shorting TMV, I have moved in favor of going long EDV and shorting TMF. I believe TMF will be a dramatic loser in the coming years, as rates rise overall with a lot of choppiness in between. Even if rates fall, long EDV/short TMF is a winner. TMF is a dud going forward.
Would you mind sharing your current positions? How do you pick your strike/duration?
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

coingaroo wrote: Sun Oct 18, 2020 4:18 am
newguy123 wrote: Thu Oct 15, 2020 8:45 pm I have a question about a catastrophe loss risk

Which is more risky

100% in a stock like Apple or Microsoft (buy and hold for 10 years ) with no stop loss

Or

100% in tqqq or upro for 10 years with a 20% stop loss ?


For some reason I am thinking all in one stock is less risky and probably would have better returns . The biggest risk would be bankruptcy for the single stock
Both are seriously risky: if you have a 20% stop loss on a 3x leveraged instrument, you'll trigger the stop loss in less than 3 months. If you buy an individual stock, you can get completely wiped out, and even worse, you are not rewarded for diversifiable risk (i.e. it won't perform any better than an index fund).
You will stopped out with the 20% stop loss.

I'd consider a laddered VIX call hedge.

I'd hedge my portfolios with VIX 10 delta calls, usually 25-40 basis points of net liquid account worth (0.0025 - 0.0034 x NLW) depending on where the VIX is when I am buying them. Purchase them every third Wednesday of the month, 4 months out, and let them expire worthless. In a cash-secured account, your maximum theoretical drawdown occurs somewhere around a 20% decline in the S&P where you should see an unrealized 10-15% loss. At 2008 level drawdowns you would see a profit. In March 2020, they returned a substantial profit due to the speed of the decline in the S&P.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ljford7 »

stockmaster wrote: Fri Oct 23, 2020 3:54 amBTW Uncorrelated I just wanted to say I agree with you here, but I'm not quite sure how best to diversify outside the two-fund original. What do you suggest?
No offense, but if you don't already know the answer to that question, then this is 100% the wrong strategy for you. This is an advanced and risky strategy that should only be a very small part of a portfolio (small enough that if it crashes and burns, you retirement outcome isn't largely affected).

For where to truly start: https://www.bogleheads.org/wiki/Getting_started

(BTW, not trying to be a a-hole, but this isn't for investors just starting out and learning the ropes.)
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

perfectuncertainty wrote: Fri Oct 23, 2020 11:13 am You will stopped out with the 20% stop loss.

I'd consider a laddered VIX call hedge.

I'd hedge my portfolios with VIX 10 delta calls, usually 25-40 basis points of net liquid account worth (0.0025 - 0.0034 x NLW) depending on where the VIX is when I am buying them. Purchase them every third Wednesday of the month, 4 months out, and let them expire worthless. In a cash-secured account, your maximum theoretical drawdown occurs somewhere around a 20% decline in the S&P where you should see an unrealized 10-15% loss. At 2008 level drawdowns you would see a profit. In March 2020, they returned a substantial profit due to the speed of the decline in the S&P.
Why not allocate to a VIX ETF instead?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by randyharris »

Off Topic, but seems like the place to mention it... I was working on some backtesting and needed Leveraged ETF data further than they actually go, so created monthly LETFsim data for QLD, TQQQ, SSO, UPRO, UBT, UST, TMF, and TYD.

If it may be of use, you're welcome to it.

On Dropbox here: https://www.dropbox.com/s/zofytwbiimknk ... x.zip?dl=0
Texanbybirth
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

firebirdparts wrote: Tue Oct 20, 2020 7:56 am
Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
Well, most of the posts are people asking whether somebody would reiterate everything that's been said, because they don't want to read it all.
Lol, that is so true. :beer
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

stockmaster wrote: Fri Oct 23, 2020 12:30 pm
perfectuncertainty wrote: Fri Oct 23, 2020 11:13 am You will stopped out with the 20% stop loss.

I'd consider a laddered VIX call hedge.

I'd hedge my portfolios with VIX 10 delta calls, usually 25-40 basis points of net liquid account worth (0.0025 - 0.0034 x NLW) depending on where the VIX is when I am buying them. Purchase them every third Wednesday of the month, 4 months out, and let them expire worthless. In a cash-secured account, your maximum theoretical drawdown occurs somewhere around a 20% decline in the S&P where you should see an unrealized 10-15% loss. At 2008 level drawdowns you would see a profit. In March 2020, they returned a substantial profit due to the speed of the decline in the S&P.
Why not allocate to a VIX ETF instead?
It's a black swan hedge and you don't want to tie up a large amount of your money in a VIX ETF that may not provide the necessary hedge if it is underfunded. The nature and leverage in VIX call options provide safety at a lower cost. Back test it and see.
ljford7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ljford7 »

randyharris wrote: Fri Oct 23, 2020 4:13 pm Off Topic, but seems like the place to mention it... I was working on some backtesting and needed Leveraged ETF data further than they actually go, so created monthly LETFsim data for QLD, TQQQ, SSO, UPRO, UBT, UST, TMF, and TYD.

If it may be of use, you're welcome to it.

On Dropbox here: https://www.dropbox.com/s/zofytwbiimknk ... x.zip?dl=0
Thank you for sharing!
M1garand30064
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by M1garand30064 »

randyharris wrote: Fri Oct 23, 2020 4:13 pm Off Topic, but seems like the place to mention it... I was working on some backtesting and needed Leveraged ETF data further than they actually go, so created monthly LETFsim data for QLD, TQQQ, SSO, UPRO, UBT, UST, TMF, and TYD.

If it may be of use, you're welcome to it.

On Dropbox here: https://www.dropbox.com/s/zofytwbiimknk ... x.zip?dl=0
How did you generate this? Did you use the same method siamba did?

I'd also like data for utilities. I am 40% UPRO, 15% UTSL and 45% TMF. The lower violatility of utilities and correlation of only 0.5 with the S&P make it an attractive diversifier.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by randyharris »

M1garand30064 wrote: Sat Oct 24, 2020 10:40 pm
randyharris wrote: Fri Oct 23, 2020 4:13 pm Off Topic, but seems like the place to mention it... I was working on some backtesting and needed Leveraged ETF data further than they actually go, so created monthly LETFsim data for QLD, TQQQ, SSO, UPRO, UBT, UST, TMF, and TYD.

If it may be of use, you're welcome to it.

On Dropbox here: https://www.dropbox.com/s/zofytwbiimknk ... x.zip?dl=0
How did you generate this? Did you use the same method siamba did?

I'd also like data for utilities. I am 40% UPRO, 15% UTSL and 45% TMF. The lower violatility of utilities and correlation of only 0.5 with the S&P make it an attractive diversifier.
I took the daily 1x fund, multiplied the daily change by 1.95 for the 2X funds and I think 2.95 for the 3X (have seen some studies before about those being very close multiples to use) then calculated monthly returns from the daily. Nothing complicated just took some time, the spreadsheet has all formulas, you can backtrack through it.

I got the historical 1x data from finance Yahoo.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stockmaster »

perfectuncertainty wrote: Fri Oct 23, 2020 9:36 pm
stockmaster wrote: Fri Oct 23, 2020 12:30 pm
perfectuncertainty wrote: Fri Oct 23, 2020 11:13 am You will stopped out with the 20% stop loss.

I'd consider a laddered VIX call hedge.

I'd hedge my portfolios with VIX 10 delta calls, usually 25-40 basis points of net liquid account worth (0.0025 - 0.0034 x NLW) depending on where the VIX is when I am buying them. Purchase them every third Wednesday of the month, 4 months out, and let them expire worthless. In a cash-secured account, your maximum theoretical drawdown occurs somewhere around a 20% decline in the S&P where you should see an unrealized 10-15% loss. At 2008 level drawdowns you would see a profit. In March 2020, they returned a substantial profit due to the speed of the decline in the S&P.
Why not allocate to a VIX ETF instead?
It's a black swan hedge and you don't want to tie up a large amount of your money in a VIX ETF that may not provide the necessary hedge if it is underfunded. The nature and leverage in VIX call options provide safety at a lower cost. Back test it and see.
But VIX ETFs do provide good hedging at very low allocation amounts. See this for a (quickly-made) example:

Image

So adding a VIX ETF behaves exactly how you want hedging to behave... You trade a lower CAGR for higher ratios and lower maximum drawdowns. And keep in mind some VIX ETFs, like XVZ, will not just shoot to zero with time (if you bought $10,000 in XVZ when it came out in September 2011 you'd still have $7,000 now) so ETF investing is not a total loss, unlike your constantly-expiring call options.

How much exactly do your options decrease your max drawdown and increase your ratios in comparison?
Mickelous
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Mickelous »

randyharris wrote: Fri Oct 23, 2020 4:13 pm Off Topic, but seems like the place to mention it... I was working on some backtesting and needed Leveraged ETF data further than they actually go, so created monthly LETFsim data for QLD, TQQQ, SSO, UPRO, UBT, UST, TMF, and TYD.

If it may be of use, you're welcome to it.

On Dropbox here: https://www.dropbox.com/s/zofytwbiimknk ... x.zip?dl=0
Hey there,
Trying to upload this to Pv and getting the file is too large error. Anyone know how to fix this?
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

stockmaster wrote: Sun Oct 25, 2020 1:41 am
perfectuncertainty wrote: Fri Oct 23, 2020 9:36 pm
stockmaster wrote: Fri Oct 23, 2020 12:30 pm
perfectuncertainty wrote: Fri Oct 23, 2020 11:13 am You will stopped out with the 20% stop loss.

I'd consider a laddered VIX call hedge.

I'd hedge my portfolios with VIX 10 delta calls, usually 25-40 basis points of net liquid account worth (0.0025 - 0.0034 x NLW) depending on where the VIX is when I am buying them. Purchase them every third Wednesday of the month, 4 months out, and let them expire worthless. In a cash-secured account, your maximum theoretical drawdown occurs somewhere around a 20% decline in the S&P where you should see an unrealized 10-15% loss. At 2008 level drawdowns you would see a profit. In March 2020, they returned a substantial profit due to the speed of the decline in the S&P.
Why not allocate to a VIX ETF instead?
It's a black swan hedge and you don't want to tie up a large amount of your money in a VIX ETF that may not provide the necessary hedge if it is underfunded. The nature and leverage in VIX call options provide safety at a lower cost. Back test it and see.
But VIX ETFs do provide good hedging at very low allocation amounts. See this for a (quickly-made) example:

Image

So adding a VIX ETF behaves exactly how you want hedging to behave... You trade a lower CAGR for higher ratios and lower maximum drawdowns. And keep in mind some VIX ETFs, like XVZ, will not just shoot to zero with time (if you bought $10,000 in XVZ when it came out in September 2011 you'd still have $7,000 now) so ETF investing is not a total loss, unlike your constantly-expiring call options.

How much exactly do your options decrease your max drawdown and increase your ratios in comparison?
Baseline - If we use 55/45 UPRO / TMF from 10/2011 till now the CAGR is 31.25%. If we use 48/44/8 UPRO/TMF/XVZ the CAGR is 27.89%. So the hedge is costing us 3.36% CAGR. In dollar terms on a 100k account, the cost of allocating 8% to UVX since 10/2011 is $248k. That's a significant cost but if it saves us in a Black Swan it might be worth it.

First some observations about XVZ
1. Look at the XVZ volume - it's almost nonexistent and has a spread of 0.25.
2. When everything was getting killed in 3/20 the high was only 20% higher than it is now (so not much protection). Is that a sufficient enough hedge? Let's see what the hedge would be worth on 3/16/2020.

Put 8k in UVX starting on 10/2011 (per your proposed start date). Model it in PV. On 2/28/2020 the XVZ hedge would be worth $2,552 and have a price of $20.12 / share and we would have 127 shares. On 3/16 the price per share rose to $42.13 and the XVZ hedge would be worth it would be worth $5,343!

The UVX hedge cost you $243k in performance and provided absolutely no relief in March 2020.

Now let's model the VIX Option Hedge. In PV model the 55/45 UPRO/TMF allocation with a 0.3% withdrawal each month to pay for the hedge. The CAGR is 26.64% (less than the UVX Hedge). The hedge cost us $327k versus the straight 55/45 UPRO/TMF HFEA!! That seems heavy!! Was it worth it?

Remember how we construct the hedge. Take 30 basis point (0.3%) per month and buy 10 delta VIX call options 120 days to expiration.

In 11/2019 we buy the 10 delta call options 120 days out (March 2020 expiration). We repeat that each month (In December 2019 we buy the 10 delta April expiration VIX calls with using the 0.3% we withdraw each month. Repeat for January and February buying the May and Jun 10 delta VIX calls respectively.

On 3/16/2020 the VIX Hedge was worth $736,193! That is a hedge that costs money but saves us in a Black Swan. Cash-out the hedge and stay the course. The portfolio would be worth $1.59 million versus the straight 55/45 HFEA with a value of $1.182 million!

I pick the VIX option hedge. No brainer.

PS - to perform the modeling I used PV for the UPRO/TMF and XVZ allocation model. For the VIX options, I used the Thinkorswim analyze function to model the purchase and pricing of the options. I put the results in excel to do the final computation. I believe this is a major protection to using the HFEA 55/45 UPRO model in order to protect the leveraged SP500 ETF against binary events such as the 3/20 major drawdown and come out ahead.

I would appreciate it if any other members here would double check my logic, modeling and math.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by a3madhav »

I'm waiting until after election but considering dropping $15k into this "fund", specifically with a split of UPRO/TQQQ/TMF as 35/20/45, so basically 60% in leveraged equities and 40% in TMF.

Does anyone have any thoughts on this? I'm unable to backtest it all the way before to the dotcom crash, does anyone have a simulation to see what would happen? I am sure TQQQ got murdered so I am wondering if this strategy would even work.

I'm 22 right now, thinking of riding this $15k to a million or down to 0, thoughts?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kerstverlichting »

a3madhav wrote: Tue Oct 27, 2020 2:00 am I'm waiting until after election but considering dropping $15k into this "fund", specifically with a split of UPRO/TQQQ/TMF as 35/20/45, so basically 60% in leveraged equities and 40% in TMF.

Does anyone have any thoughts on this? I'm unable to backtest it all the way before to the dotcom crash, does anyone have a simulation to see what would happen? I am sure TQQQ got murdered so I am wondering if this strategy would even work.

I'm 22 right now, thinking of riding this $15k to a million or down to 0, thoughts?
Lately, TMF offsetting UPRO/TQQQ has been behaving more as one would expect again. E.g. yesterday it worked just fine. So as for me personally, I still think the strategy is solid, even with these low rates we can probably still ride it all the way to 0% and perhaps beyond. I only got a few grand in it, but I think it's worth the shot. If it wont work, you might lose maybe half or 3/4, it won't realistically got to 0.


I got a question for people doing Inverse Volatility. What rebalancing period would be advisable in this case? A month or a quarter? I know it's based off the 1 month volatility of the assets, does that mean the rebalancing period is also to be 1 month?
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

a3madhav wrote: Tue Oct 27, 2020 2:00 am Does anyone have any thoughts on this? I'm unable to backtest it all the way before to the dotcom crash, does anyone have a simulation to see what would happen? I am sure TQQQ got murdered so I am wondering if this strategy would even work.
It would work great, even if TQQQ goes to zero, provided you don't rebalance too soon. There is some luck involved with that. For instance, this year, if you're rebalancing quarterly on January 1, April 1, July 1, and October 1, you'd be feeling pretty happy. But that's luck. The dotcom crash took 2 years, so with hindsight, annual would have been the lucky guess back then. I presume nobody would ever guess biannual rebalancing.

Anyway, that is the reason that half the strategy is bonds. You just have to understand that when you spend those bonds, whenever it is, you can't know what the future holds.
A fool and your money are soon partners
keith6014
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by keith6014 »

BuffMaltese wrote: Thu Oct 22, 2020 10:18 pm As someone who started their adventure recently, I’m strongly leaning towards just pulling out and waiting until TMF comes back to earth. Maybe once it hits 28. It’s odd that if just feels too risky because of the bond portion. Going to try to short tmf until January too.

What are some temporary alternative strategies to keep a decent amount of money in upro? Buying the dip, spxs calls?
Buy deep in the money SPY call (10 percent deep) expiring 18 months from now. That will give you a 5x exposure at $5,800 (Today's price)?
perfectuncertainty
Posts: 145
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

keith6014 wrote: Tue Oct 27, 2020 7:04 pm
BuffMaltese wrote: Thu Oct 22, 2020 10:18 pm As someone who started their adventure recently, I’m strongly leaning towards just pulling out and waiting until TMF comes back to earth. Maybe once it hits 28. It’s odd that if just feels too risky because of the bond portion. Going to try to short tmf until January too.

What are some temporary alternative strategies to keep a decent amount of money in upro? Buying the dip, spxs calls?
Buy deep in the money SPY call (10 percent deep) expiring 18 months from now. That will give you a 5x exposure at $5,800 (Today's price)?
18 months 10% deep Spy call is the March 18,2022 at a 295 strike price. It will cost you $62 per contract and as of today's close on the date of expiration SPY you would break even if SPY is at 357.08. The probability of profit at expiration is 40% according to the options analyzer I checked.
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