HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by stripedzebra »

cos wrote: Tue Jan 19, 2021 3:38 amDovahkiin posted an excellent analysis upthread revealing how this strategy remains feasible in taxable despite the tax drag: viewtopic.php?p=5073214#p5073214
Looking at the tax drag rate for monthly rebalances (with additional cash first) really does tempt the "all in" idea... :shock:
fallingeggs
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by fallingeggs »

jarjarM wrote: Tue Jan 19, 2021 8:09 pm I know most (if not all) of the discussions in this thread is about how to leverage up, how to rebalance, what is the risk-off position (TMF vs EDV) or the risk-on position (UPRO vs TQQQ). Have anyone thought about how to wind down this strategy, especially in the taxable? At what point does one start to deleverage? Just curious... :beer
I don't think it is that complicated... Get out when you start to come close to your "medium" FI number, whatever that is. Yes, you'll have to pay taxes, so you'll need to take that into account. Trick is not to be greedy and "just stick it out for one more year!" Perhaps after your "medium" FI in tucked away in a sane portfolio, you can start moving excess back to this strategy to reach for a "fat" FI.

If my memory serves me correct, HEDGEFUNDIE's sane portfolio alone is designed to achieve a normal FI, so this adventure is pure gravy and he can afford to let it fatten up.
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willthrill81
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by willthrill81 »

fallingeggs wrote: Wed Jan 20, 2021 10:55 am If my memory serves me correct, HEDGEFUNDIE's sane portfolio alone is designed to achieve a normal FI, so this adventure is pure gravy and he can afford to let it fatten up.
That's correct. The HFEA approach is a sort of 'expensive lottery ticket' where the at least historic odds are stacked in your favor of 'winning', possibly in a big way, but where there is at least a small chance that you'll significantly underperform a more traditional investment approach.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Crushtheturtle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Crushtheturtle »

I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
If you're not having fun, you'll just have to pretend.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

cos wrote: Tue Jan 19, 2021 11:35 pm
jarjarM wrote: Tue Jan 19, 2021 8:09 pm I know most (if not all) of the discussions in this thread is about how to leverage up, how to rebalance, what is the risk-off position (TMF vs EDV) or the risk-on position (UPRO vs TQQQ). Have anyone thought about how to wind down this strategy, especially in the taxable? At what point does one start to deleverage? Just curious... :beer
Dovahkiin had you beat on this one, too: viewtopic.php?p=5167821#p5167821
Darn it, I missed the March-April of this thread while knee deep playing the market. There's lots of good stuff I missed. Thanks cos. BTW, I like your idea of de-risk, I may have to steal it :sharebeer
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

fallingeggs wrote: Wed Jan 20, 2021 10:55 am
jarjarM wrote: Tue Jan 19, 2021 8:09 pm I know most (if not all) of the discussions in this thread is about how to leverage up, how to rebalance, what is the risk-off position (TMF vs EDV) or the risk-on position (UPRO vs TQQQ). Have anyone thought about how to wind down this strategy, especially in the taxable? At what point does one start to deleverage? Just curious... :beer
I don't think it is that complicated... Get out when you start to come close to your "medium" FI number, whatever that is. Yes, you'll have to pay taxes, so you'll need to take that into account. Trick is not to be greedy and "just stick it out for one more year!" Perhaps after your "medium" FI in tucked away in a sane portfolio, you can start moving excess back to this strategy to reach for a "fat" FI.

If my memory serves me correct, HEDGEFUNDIE's sane portfolio alone is designed to achieve a normal FI, so this adventure is pure gravy and he can afford to let it fatten up.
That sounds like a reasonable approach, we already hit our normal FI # so I may just use this strategy for my legacy account.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
This seems a bit overly dramatic. It's a good point that we should be prepared for the possibility of an ETF shutdown, but it's not like it makes the whole strategy a bad idea.

If UPRO closed down in a crash, I'd just take any capital losses (presumably such crash would be catastrophic enough to wipe out my gains), and move to an alternative like SPXL or TQQQ. If regulators shut down all 3x funds then I could move to futures, or LEAPS, or margin loans, it's just more work.

While there may be some risk of funds closing in a crash, UPRO, SPXL, and TQQQ all had hundreds of millions of AUM even at the March bottom, so it seems unlikely that they'd all go under unless they were regulated out of existence, which would presumably be hard to do with the cat out of the bag already.

I'm more worried about them shutting down when I'm *up* by a lot and triggering a large unexpected taxable event.
RonSea
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RonSea »

Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.

I think for someone whose alternative portfolio to HEFE is a traditional aggressive portfolio (eg. 70% US equities 30% international equities) this isn't a huge risk. If the market drops 45% and UPRO liquidates at 5% then it's almost certain to be combined with a rise in TMF -- even at times when the assets aren't heavily correlated. Note: Not guaranteed in the future.

In (IMO) an unlikely scenario where TMF doesn't rise (perhaps the market floods to gold and fed decides not to lower interest rates) this portfolio falls 52.5% compared to the previously-mentioned equities portfolio falling ~45%. Falling 7.5% more than the alternative portfolio sounds like a decent trade-off for double the average return per year. And if an aggressive high-equities portfolio isn't your alternative then I'm guessing your risk tolerances are lower and you should be considering a less leveraged version.

The deadly risk to this strategy is a repeat of the great inflation in the early/mid 70s. It crushed any non-commodities portfolio but causes exceptional pain to 55/45, falling ~80%.

That said, I do think you're right that it's good to have a plan for market movements that cause UPRO to shut down. It's probably good to have a plan both for:
1. When UPRO (or TMF) get exceptionally low -- say 15%. Do you risk rebalancing at a time when the fund risks closing?
2. If UPRO completely closes. Do you rebalance TMF funds with SSO? NTSX? VTI? Gold? Cash?
majasan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by majasan »

Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
hi.. just two points for your consideration.
(1) 70-30 is NOT the recommended allocation. The OP took a very long time to adjust up his original 40% to 55 UPRO.
(2) OP has warned multiple times to NOT add to the original lump sum investment as he considers this as a 'lottery' ticket only.
The tone of OP AFAIK is that if you are doing a variation then you are on your own and should not attribute the wins or losses to his OP.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

Not sure if there’s much correlation between a market crash and risk of UPRO closing. UPRO is meant for daily trading, it could just as easily be as popular during a market crash as now. The vast majority of holders are day trading it. As long as AUM stays relatively high (~$50M) I wouldn’t worry too much. But it’s a risk to consider.
fallingeggs
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by fallingeggs »

privatefarmer wrote: Wed Jan 20, 2021 4:04 pm Not sure if there’s much correlation between a market crash and risk of UPRO closing. UPRO is meant for daily trading, it could just as easily be as popular during a market crash as now. The vast majority of holders are day trading it. As long as AUM stays relatively high (~$50M) I wouldn’t worry too much. But it’s a risk to consider.
Agreed. The ETF sponsors are making way too much money to voluntarily close the ETFs. Even in a downturn when their AUM is cut to 5% of today's value, they should still be profitable. The only leveraged ETFs that were forced to close is that one on VIX, and if you don't know why that LETF is different than UPRO, you don't understand LETFs nearly enough. Now, having the new head of the SEC regulate it out of existence is very real. More so when there are stories like Crushtheturtle's.

This thread has been very clear that most people should not attempt the adventure because most people can't stomach the volatility. Not sure how else you can say this.
as9
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by as9 »

It's becoming very tempting to rebalance again. I think I only feel this way because my basis for TMF is 42.37 and UPRO is 49.98.
LeverageWBeverage
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
It looks like it all would of worked out if you left it alone. Even though you got in so close to a crash. You'd be slightly better off in 55/45 as of now and you would not of crashed as badly in March.

https://www.portfoliovisualizer.com/bac ... mbol3=ITOT
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RovenSkyfall
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RovenSkyfall »

LeverageWBeverage wrote: Thu Jan 21, 2021 3:04 pm
Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
It looks like it all would of worked out if you left it alone. Even though you got in so close to a crash. You'd be slightly better off in 55/45 as of now and you would not of crashed as badly in March.

https://www.portfoliovisualizer.com/bac ... mbol3=ITOT
A good highlight on behavior being a much worse enemy to the performance of HFEA (or a variant) than the actual risks. And thus, unless one is certain of their risk tolerance (ideally with history of how one handles a significant downturn), they ought not do more than a small portion of their portfolio (5% or so).
I saved my money, but it can't save me | The Chariot
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

privatefarmer wrote: Wed Jan 20, 2021 4:04 pm Not sure if there’s much correlation between a market crash and risk of UPRO closing. UPRO is meant for daily trading, it could just as easily be as popular during a market crash as now. The vast majority of holders are day trading it. As long as AUM stays relatively high (~$50M) I wouldn’t worry too much. But it’s a risk to consider.
Leveraged ETFs/ETNs do tend to shut down during a crash. Say UPRO crashes 95% from now, it'll go below the minimum listing price. Usually the fund manager won't do a share consolidation to rescue the fund, at least as history suggests.

But I agree with another poster upthread that if the ETF does close, you can go to another ETF or simulate one on your own. So as long as you're determined to stick to the strategy you can always continue doing it.
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

fallingeggs wrote: Wed Jan 20, 2021 4:37 pm
privatefarmer wrote: Wed Jan 20, 2021 4:04 pm Not sure if there’s much correlation between a market crash and risk of UPRO closing. UPRO is meant for daily trading, it could just as easily be as popular during a market crash as now. The vast majority of holders are day trading it. As long as AUM stays relatively high (~$50M) I wouldn’t worry too much. But it’s a risk to consider.
Agreed. The ETF sponsors are making way too much money to voluntarily close the ETFs. Even in a downturn when their AUM is cut to 5% of today's value, they should still be profitable. The only leveraged ETFs that were forced to close is that one on VIX, and if you don't know why that LETF is different than UPRO, you don't understand LETFs nearly enough. Now, having the new head of the SEC regulate it out of existence is very real. More so when there are stories like Crushtheturtle's.

This thread has been very clear that most people should not attempt the adventure because most people can't stomach the volatility. Not sure how else you can say this.
Maybe I missed it but could you share what's Curshtheturtle's story?
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

CMS_Flash wrote: Thu Jan 21, 2021 7:47 pm Maybe I missed it but could you share what's Curshtheturtle's story?
Scroll up.
Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
moontower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by moontower »

I can PROVE it. Over the last 10 years, after taxes PSLDX only made 200 basis points (yes, two points or a "couple" if you prefer) over the S&P 500.

AFTER taxes is the key. Before taxes, sure, PSLDX is SUPER impressive and would work well in tax advantaged accounts as 21.69% per year is doubling you money every 3 and a half years or so.

But otherwise, its 2 points over SPY with a relatively high ER.

I think the recreated using Vanguard funds and EDV is much smarter, lower ER and lower risk of institutional or fund issues.

15.28% on PSLDX v 12.93% on SPY for last 10 years:


Return Variations 1 Year 3 Year 5 Year 10 Year
Return before Taxes 35.62% 23.18% 24.49% 21.69%
Avg Return after Taxes/Dist 29.95% 17.31% 18.17% 15.28%

PSLDX Tax Cost Ratio 4.18% 4.76% 5.08% 5.26%
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

moontower wrote: Thu Jan 21, 2021 8:34 pm I can PROVE it. Over the last 10 years, after taxes PSLDX only made 200 basis points (yes, two points or a "couple" if you prefer) over the S&P 500.

AFTER taxes is the key. Before taxes, sure, PSLDX is SUPER impressive and would work well in tax advantaged accounts as 21.69% per year is doubling you money every 3 and a half years or so.

But otherwise, its 2 points over SPY with a relatively high ER.

I think the recreated using Vanguard funds and EDV is much smarter, lower ER and lower risk of institutional or fund issues.

15.28% on PSLDX v 12.93% on SPY for last 10 years:


Return Variations 1 Year 3 Year 5 Year 10 Year
Return before Taxes 35.62% 23.18% 24.49% 21.69%
Avg Return after Taxes/Dist 29.95% 17.31% 18.17% 15.28%

PSLDX Tax Cost Ratio 4.18% 4.76% 5.08% 5.26%
Isn't that why over at the PSLDX thread, the recommendation has always been using a tax advantaged account and hopefully one will have lower tax bracket during retirement (especially for those who are planning on FIRE).
corp_sharecropper
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by corp_sharecropper »

moontower wrote: Thu Jan 21, 2021 8:34 pm I can PROVE it. Over the last 10 years, after taxes PSLDX only made 200 basis points (yes, two points or a "couple" if you prefer) over the S&P 500.

AFTER taxes is the key. Before taxes, sure, PSLDX is SUPER impressive and would work well in tax advantaged accounts as 21.69% per year is doubling you money every 3 and a half years or so.

But otherwise, its 2 points over SPY with a relatively high ER.

I think the recreated using Vanguard funds and EDV is much smarter, lower ER and lower risk of institutional or fund issues.

15.28% on PSLDX v 12.93% on SPY for last 10 years:


Return Variations 1 Year 3 Year 5 Year 10 Year
Return before Taxes 35.62% 23.18% 24.49% 21.69%
Avg Return after Taxes/Dist 29.95% 17.31% 18.17% 15.28%

PSLDX Tax Cost Ratio 4.18% 4.76% 5.08% 5.26%
I don't think anyone with common sense holds PSLDX in a taxable account. It's kinda like criticizing tonic water for not being better than tap at quenching thirst, that's not what people use it for. When you look at AUM and given the past returns, it's pretty obvious that the AUM is lower than it would likely be exactly because of the tax situation (in case you hadn't notice, there are always tons of dollars piling into funds with that sort of performance under typical circumstances).
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

privatefarmer wrote: Wed Jan 20, 2021 4:04 pm
Wait can you give us an update on how everything went with your HF adventure implementation? Idk if I missed your update after everything that happened in March.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
moontower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by moontower »

I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
“Reset” and “decay” are baked into the share price. Backtesting includes those effects as well as the effect of the expense ratio. The only element of the return not incorporated in the share price is the effect of dividends or capital gains distributions which are negligible.

Your analysis is totally static. You just picked two dates and looked at the share price. Doesn’t tell us anything. Most holders rebalanced from TMF into UPRO mid-2020 which fueled a huge boost in return.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

Impatience wrote: Thu Jan 21, 2021 9:11 pm
moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
“Reset” and “decay” are baked into the share price. Backtesting includes those effects as well as the effect of the expense ratio. The only element of the return not incorporated in the share price is the effect of dividends or capital gains distributions which are negligible.

Your analysis is totally static. You just picked two dates and looked at the share price. Doesn’t tell us anything. Most holders rebalanced from TMF into UPRO mid-2020 which fueled a huge boost in return.
I've owned QLD (2x leveraged) for years. I've made many times more than if I had held QQQ. I've owned SSO for a few years (less than QLD) and I've trounced SPY.

Those who want to split hairs and do things like analyzing the LIBOR have probably experienced paralysis analysis over and over and will have little to show for how smart they are!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tingting1013 »

moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
I don’t think you understand how this works
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dziuniek
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

Tingting1013 wrote: Thu Jan 21, 2021 10:04 pm
moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
I don’t think you understand how this works
Eeerr.... 70% UPRO + 30% TMF quarterly reblanced (which is pretty standard around here) returned: 57% for 2020....


Not rebalanced returned 19%

portfoliovisualizer dot com.

Where are you getting your numbers from? lol
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
So I realize the replies haven't been very illuminating. Three things you need to consider:
0. You mutiplied the returns by .7 and .3 twice. 9.43 + 4.8% would be 14.23%, not 6.19%
1. The distributions. Everybody has to consider those always whether they want to or not. UPRO's were small, but TMF is respectable.
2. There is luck involved in rebalance timing where you have volatility, and of course we had plenty. People rebalancing blindly on April 1 made a killing on UPRO. This is luck. Not much we can do about luck.
A fool and your money are soon partners
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dziuniek
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

firebirdparts wrote: Fri Jan 22, 2021 11:28 am
moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
So I realize the replies haven't been very illuminating. Three things you need to consider:
0. You mutiplied the returns by .7 and .3 twice. 9.43 + 4.8% would be 14.23%, not 6.19%
1. The distributions. Everybody has to consider those always whether they want to or not. UPRO's were small, but TMF is respectable.
2. There is luck involved in rebalance timing where you have volatility, and of course we had plenty. People rebalancing blindly on April 1 made a killing on UPRO. This is luck. Not much we can do about luck.
Well, I rebalnce my normal portfolio quareterly to keep my risk constant. I made money in my boglehead portfolio too.
So I guess everyone who rebalances got lucky.

Rebalancing bands would've worked well enough too - assuming they were wide enough. -> that would be more lucky.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

moontower wrote: Thu Jan 21, 2021 8:58 pm I don't see how this strategy works because of the decay in the instruments. Backtesting isn't accurate because glosses over the daily reset and decay.

LOOK at 2020 as an example with hard numbers. You'd be DOWN approx. -9% versus 15% on S&P for 2020, not to mention the exhorbitant ER fees on UPRO/TMF.

UPRO: 70%
Jan 2, 2020 price: 71.90
Dec 31, 2020 price: 76.86 (+6.89% x .7 = 4.8%)

TMF: 30%
Jan 2, 2020 price: 26.73
Dec 31, 2020 price: 35.14 (+31.46% x .3 = 9.43%)

TOTAL return = 6.19% v 15% for S&P
You need to check your math here. When tickers are doing +6.89% and +31.46%, the mixture of these will necessarily be in the middle somewhere, not lower.
Last edited by Marseille07 on Fri Jan 22, 2021 7:44 pm, edited 1 time in total.
RoomyEmphasis
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RoomyEmphasis »

Is anybody using deeply out-of-the-money protective puts for both UPRO / TMF (say, strike price at 50% of current UPRO / TMF prices)? My thinking is that it would be easier to "stay the course" if you know that you can't lose more than 50% of your portfolio under any circumstance. Markets could tank, stocks and bonds could become correlated, the products could be delisted -- but you would never experience more than a 50% drawdown. My guess is that you would need to make a firm rule to never sell when the market goes down 20-30% (i.e., to "juice" returns) but to always hold until expiration or roll it into a new contract when UPRO / TMF prices go up too much and it's no longer effective "portfolio insurance".

The UPRO / TMF strategy looks brilliant as long as stocks and bonds are anticorrelated. What was most shocking to me about March 2020 was the 3/16/20-3/18/20 period when UPRO was down 20% and TMF was down 32% in just two days. Not only is a ~25% two-day decline hard to stomach, but I'm sure that folks were worried about the products being delisted. Deeply OTM portfolio insurance feels like it would be psychologically valuable in that situation. I understand that these products are unlikely to ever be delisted, but in the depths of a crash it may be harder to stay rational. UPRO was down ~75% in four weeks around that time.

Based on current IV, it looks like this would cost 5% for 12mo of "protection". This would have knocked ~800bps off your return in 2020, but you still would have come out ahead of PSLDX, NTSX, etc. I assume that the premium would be lower than this during normal times where IV is lower. Anyone have a good source for historical options pricing to check?

It seems like one big way you get in trouble is if there are long periods of really choppy up-and-down moves, in which case the premiums end up being a huge drag on returns and you lose out vs. the S&P500. Are there any others that come to mind?
Last edited by RoomyEmphasis on Fri Jan 22, 2021 1:49 pm, edited 4 times in total.
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

cos wrote: Thu Jan 21, 2021 8:20 pm
CMS_Flash wrote: Thu Jan 21, 2021 7:47 pm Maybe I missed it but could you share what's Curshtheturtle's story?
Scroll up.
Crushtheturtle wrote: Wed Jan 20, 2021 12:26 pm I see that this thread remains popular, attracting curious newcomers.

I will gently restate my own experience for their consideration, as I also found the strategy compelling.

Around December 2019, I committed a significant % of my portfolio to this strategy. Approximately 70/30 UPRO/TMF if memory serves. Given my own personal financial circumstances, I believed myself impervious to the expected and increased volatility. I did a ton of research and tracked everything with a spreadsheet.

The market selloff of Feb/Mar 2020 caused my UPRO holdings to fall 60-70%, which represented a very significant, unrealized dollar loss.
UPRO shares that I had purchased at >$70 were now trading in the teens. I was not comforted by the negative correlation of TMF.

I could do nothing at that point except throw fresh capital at UPRO in order to lower its average cost basis. By sheer luck, I made a major purchase in late March, almost at the exact low. And as we all know, the market recovered, eventually allowing me to exit the strategy with a profit.

My point: Under-appreciated Management Risk

The likes of Vanguard, Fidelity, and Blackrock will probably never go bankrupt.
Proshares? Direxion? Will they go bust? They are obviously smaller firms. More importantly, they are practically screaming from the rooftops that these funds are not meant to be held overnight.

Why is that? Because apparently they have no qualms about closing these funds if the price falls too far.

I knew that they had shuttered their leveraged funds in the past, so in the depths of my March despair, I started Googling to try and find out just how far the price could fall before these managers decided that keeping their 3x S&P500 ETF's open was more trouble than it's worth. I did not find an answer, but common sense says that it has to be at a price level greater than absolute zero.

What do you plan on using to "hedge" UPRO during any future significant pullback? TMF... VIX... futures contracts... cash? Have fun hedging when UPRO ceases to exist as a result of regulation and/or price action. Not sure what your rebalancing strategy will be at that point...

Anyway, just my take. I've made a ton of mistakes along my investing journey, and I welcome correction and ridicule. I certainly deserve it.
Please look before you leap.
Thank you. Didn't notice the poster's handle and thought it's very far back lol.
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

RoomyEmphasis wrote: Fri Jan 22, 2021 1:38 pm Is anybody using deeply out-of-the-money protective puts for both UPRO / TMF (say, strike price at 50% of current UPRO / TMF prices)? My thinking is that it would be easier to "stay the course" if you know that you can't lose more than 50% of your portfolio under any circumstance. Markets could tank, stocks and bonds could become correlated, the products could be delisted -- but you would never experience more than a 50% drawdown. My guess is that you would need to make a firm rule to never sell when the market goes down 20-30% (i.e., to "juice" returns) but to always hold until expiration or roll it into a new contract when UPRO / TMF prices go up too much and it's no longer effective "portfolio insurance".

The UPRO / TMF strategy looks brilliant as long as stocks and bonds are anticorrelated. What was most shocking to me about March 2020 was the 3/16/20-3/18/20 period when UPRO was down 20% and TMF was down 32% in just two days. Not only is a ~25% two-day decline hard to stomach, but I'm sure that folks were worried about the products being delisted. Deeply OTM portfolio insurance feels like it would be psychologically valuable in that situation. I understand that these products are unlikely to ever be delisted, but in the depths of a crash it may be harder to stay rational. UPRO was down ~75% in four weeks around that time.

Based on current IV, it looks like this would cost 5% for 12mo of "protection". This would have knocked ~800bps off your return in 2020, but you still would have come out ahead of PSLDX, NTSX, etc. I assume that the premium would be lower than this during normal times where IV is lower. Anyone have a good source for historical options pricing to check?

It seems like one big way you get in trouble is if there are long periods of really choppy up-and-down moves, in which case the premiums end up being a huge drag on returns and you lose out vs. the S&P500. Are there any others that come to mind?
I'm also thinking about this. And I'm wondering if this could be done without hurting the return. Basically from history it's safe to assume that we will encounter at least one 90% drawdown for UPRO in our lifetime. If we roll a 50% ITM put continuously and only execute during such a total crash, we'll get 500%+ gain just by doing that. Say we have a 30 year investment horizon, this will be exactly 5.5% CAGR gained. So after all, if we do encounter one such crash in our lifetime, we've broken even with vanilla HFEA. If we encounter 2 (which is not that unlikely), we'll be 5X above HFEA.

This is still a very rough idea, cuz there are obviously a lot of complications. For example how do we time the execution of the ITM put. We probably shouldn't try to time the market when it crashes and our rationality declines. Instead we probably need a systematic, predetermined way to do it. Also, many 401(k) brokers don't allow options trading, which also adds a bit complications.

Just my rough ideas. Would love it if we could collectively build up this alternative strategy in this thread.
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Not sure where people are going with this. TMF is the hedge on UPRO. If you use puts instead then forget TMF.
RoomyEmphasis
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RoomyEmphasis »

Marseille07 wrote: Fri Jan 22, 2021 5:27 pm Not sure where people are going with this. TMF is the hedge on UPRO. If you use puts instead then forget TMF.
TMF is a hedge to UPRO most of the time, but the average -0.5 correlation is just that -- an average. When things get really bad, TMF and UPRO both move in the same direction -- straight down. We saw this from 3/16/20-3/18/20.

Trying to figure out some good ways to hedge against this specific problem. One solution would be some sort of consistent long volatility strategy (e.g., deeply OTM UVXY call options), but there is an appealing simplicity to just buying some cheap protective puts on the actual underlying (UPRO, TMF). Would love feedback
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

RoomyEmphasis wrote: Fri Jan 22, 2021 6:24 pm
Marseille07 wrote: Fri Jan 22, 2021 5:27 pm Not sure where people are going with this. TMF is the hedge on UPRO. If you use puts instead then forget TMF.
TMF is a hedge to UPRO most of the time, but the average -0.5 correlation is just that -- an average. When things get really bad, TMF and UPRO both move in the same direction -- straight down. We saw this from 3/16/20-3/18/20.

Trying to figure out some good ways to hedge against this specific problem. One solution would be some sort of consistent long volatility strategy (e.g., deeply OTM UVXY call options), but there is an appealing simplicity to just buying some cheap protective puts on the actual underlying (UPRO, TMF). Would love feedback
I'm not so convinced there are good ways to hedge this to be honest. UVXY calls, UPRO puts etc etc would obviously work but would eat into your gains. We can craft favorable scenarios on paper but I highly doubt real-life would unfold like the backtests.
NMBob
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NMBob »

so, just to make sure the record is clear, for the 1 year of 2020 with no rebalancing, the HEA 55upro/45 tmf returned 24 percent while the sp500 returned 18 percent.

https://www.portfoliovisualizer.com/bac ... tion2_1=45
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

Marseille07 wrote: Fri Jan 22, 2021 5:27 pm Not sure where people are going with this. TMF is the hedge on UPRO. If you use puts instead then forget TMF.
TMF for the past 30 years also delivered quite a bit growth. It is not simply a hedge. This is partly why HFEA did so well in these decades.

But I think it makes sense to potentially get rid of TMF and simply use puts as hedge. But options are significantly more complicated than a plain ETF, so I think we need quite a bit research before getting a valid UPRO/puts long-term portfolio.
BayStater
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BayStater »

NMBob wrote: Fri Jan 22, 2021 7:34 pm so, just to make sure the record is clear, for the 1 year of 2020 with no rebalancing, the HEA 55upro/45 tmf returned 24 percent while the sp500 returned 18 percent.

https://www.portfoliovisualizer.com/bac ... tion2_1=45
1 year without rebalancing is not following the HEA strategy (which calls for quarterly rebalancing). The 2020 annual return was 66.39%.

https://www.portfoliovisualizer.com/bac ... tion2_1=45
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

CMS_Flash wrote: Fri Jan 22, 2021 8:26 pm TMF for the past 30 years also delivered quite a bit growth. It is not simply a hedge. This is partly why HFEA did so well in these decades.
I agree. So...just live with it? Replacing TMF with UPRO puts would ensure protection but you lose the growth from bonds. Having TMF means UPRO and TMF can both go down at the same time. Adding puts to it would make it safer but lowers CAGR. You can't really have a cake and eat it too, imo.
RoomyEmphasis
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RoomyEmphasis »

I agree that protective puts are going to lower the CAGR. I suppose my questions are "How can we reduce risk of total capital loss?" and "Is there a way that is cheaper than rolling protective puts?"
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

Marseille07 wrote: Fri Jan 22, 2021 8:35 pm
CMS_Flash wrote: Fri Jan 22, 2021 8:26 pm TMF for the past 30 years also delivered quite a bit growth. It is not simply a hedge. This is partly why HFEA did so well in these decades.
I agree. So...just live with it? Replacing TMF with UPRO puts would ensure protection but you lose the growth from bonds. Having TMF means UPRO and TMF can both go down at the same time. Adding puts to it would make it safer but lowers CAGR. You can't really have a cake and eat it too, imo.
My thought is that by relying on the single assumption that a crash happens in 30 years, we can potentially find a way to structure UPRO with long-term ITM puts such that we don't hurt the CAGR. Sounds almost too good to be true so I'd like to investigate into it.

I'm actually okay with UPRO and TMF diving together in the short term, which wasn't very unusual in the past and probably won't be in the future. What I indeed worry about is the ability for TMF to continue delivering strong growth. With a close-to-zero interest rate, based on my limited understanding, TMF shouldn't be able to deliver any strong growth in the following decades. Correct me if I'm wrong since I really don't know much about the behavior of treasuries/bonds.
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

CMS_Flash wrote: Fri Jan 22, 2021 8:48 pm I'm actually okay with UPRO and TMF diving together in the short term, which wasn't very unusual in the past and probably won't be in the future. What I indeed worry about is the ability for TMF to continue delivering strong growth. With a close-to-zero interest rate, based on my limited understanding, TMF shouldn't be able to deliver any strong growth in the following decades. Correct me if I'm wrong since I really don't know much about the behavior of treasuries/bonds.
I think your understanding is correct. TMF doesn't have much upside but a lot of downside. Bonds didn't do well between 2015-2019 when the Fed was raising rates, for example.
NMBob
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NMBob »

BayStater wrote: Fri Jan 22, 2021 8:34 pm
NMBob wrote: Fri Jan 22, 2021 7:34 pm so, just to make sure the record is clear, for the 1 year of 2020 with no rebalancing, the HEA 55upro/45 tmf returned 24 percent while the sp500 returned 18 percent.

https://www.portfoliovisualizer.com/bac ... tion2_1=45
1 year without rebalancing is not following the HEA strategy (which calls for quarterly rebalancing). The 2020 annual return was 66.39%.

https://www.portfoliovisualizer.com/bac ... tion2_1=45
not my point and you are actually distracting from it. I perceived a comment made about perhaps the need of lucky rebalancing. well, you didn't need it this year, and if you have read most of the the actual threads, annual rebalancing itself works. quarterly likely better as you indicate, but annual works, which again leads away from lucky rebalancing ideas to make the thing work, ...which is my point.
RoomyEmphasis
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RoomyEmphasis »

Marseille07 wrote: Fri Jan 22, 2021 8:51 pm
CMS_Flash wrote: Fri Jan 22, 2021 8:48 pm I'm actually okay with UPRO and TMF diving together in the short term, which wasn't very unusual in the past and probably won't be in the future. What I indeed worry about is the ability for TMF to continue delivering strong growth. With a close-to-zero interest rate, based on my limited understanding, TMF shouldn't be able to deliver any strong growth in the following decades. Correct me if I'm wrong since I really don't know much about the behavior of treasuries/bonds.
I think your understanding is correct. TMF doesn't have much upside but a lot of downside. Bonds didn't do well between 2015-2019 when the Fed was raising rates, for example.
There's a bunch of discussion on this about 20 pages back, which comes to a different conclusion than yours. Specifically relates to bond convexity. Just a heads-up. viewtopic.php?t=288192&start=6400
Marseille07
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Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

RoomyEmphasis wrote: Sat Jan 23, 2021 12:12 am
Marseille07 wrote: Fri Jan 22, 2021 8:51 pm
CMS_Flash wrote: Fri Jan 22, 2021 8:48 pm I'm actually okay with UPRO and TMF diving together in the short term, which wasn't very unusual in the past and probably won't be in the future. What I indeed worry about is the ability for TMF to continue delivering strong growth. With a close-to-zero interest rate, based on my limited understanding, TMF shouldn't be able to deliver any strong growth in the following decades. Correct me if I'm wrong since I really don't know much about the behavior of treasuries/bonds.
I think your understanding is correct. TMF doesn't have much upside but a lot of downside. Bonds didn't do well between 2015-2019 when the Fed was raising rates, for example.
There's a bunch of discussion on this about 20 pages back, which comes to a different conclusion than yours. Specifically relates to bond convexity. Just a heads-up. viewtopic.php?t=288192&start=6400
Not sure what we're disagreeing. Bonds should do ok-to-good while the rates remain low. I was specifically talking about rising rates.
BayStater
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Joined: Sun Mar 29, 2020 11:57 pm

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

Post by BayStater »

NMBob wrote: Fri Jan 22, 2021 11:34 pm not my point and you are actually distracting from it. I perceived a comment made about perhaps the need of lucky rebalancing. well, you didn't need it this year, and if you have read most of the the actual threads, annual rebalancing itself works. quarterly likely better as you indicate, but annual works, which again leads away from lucky rebalancing ideas to make the thing work, ...which is my point.
Yes I'm sure rebalance timing leads to a significant dispersion of returns. It's very possible quarterly is overfitting. However, I'm not sure dismissing higher frequency rebalancing is right either. These products are so volatile that if you go a year without rebalancing you could be significantly off of target risk parity. Perhaps you'd be more comfortable with rebalancing bands?
CaptainFrontier
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Joined: Sat Jan 23, 2021 11:48 am

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

Post by CaptainFrontier »

Marseille07 wrote: Wed Jan 13, 2021 10:39 pm Using TVIX is a really crazy idea. It's got -5.0 beta vs the SPX give or take.
The problem with TVIX is that it has a permanent exponential decay, probably from continually buying futures contracts. For some reason, this doesn't seem to happen with XVZ though. Not gonna line, it's pretty tempting to use that as a UPRO hedge (or at least partially).
Marseille07
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Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

CaptainFrontier wrote: Sat Jan 23, 2021 11:52 am
Marseille07 wrote: Wed Jan 13, 2021 10:39 pm Using TVIX is a really crazy idea. It's got -5.0 beta vs the SPX give or take.
The problem with TVIX is that it has a permanent exponential decay, probably from continually buying futures contracts. For some reason, this doesn't seem to happen with XVZ though. Not gonna line, it's pretty tempting to use that as a UPRO hedge (or at least partially).
TVIX suffers beta slippage because it is 2x. The product's gone anyway though. I don't know much about XVZ but it appears to have its own tracking index, however it is calculated.
NMBob
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NMBob »

BayStater wrote: Sat Jan 23, 2021 11:26 am
NMBob wrote: Fri Jan 22, 2021 11:34 pm not my point and you are actually distracting from it. I perceived a comment made about perhaps the need of lucky rebalancing. well, you didn't need it this year, and if you have read most of the the actual threads, annual rebalancing itself works. quarterly likely better as you indicate, but annual works, which again leads away from lucky rebalancing ideas to make the thing work, ...which is my point.
Yes I'm sure rebalance timing leads to a significant dispersion of returns. It's very possible quarterly is overfitting. However, I'm not sure dismissing higher frequency rebalancing is right either. These products are so volatile that if you go a year without rebalancing you could be significantly off of target risk parity. Perhaps you'd be more comfortable with rebalancing bands?
II am sorry, but i am not interested in any such discussion which is already well covered many many times.. I simply made a point and you are wrongfully assuming this is reflective of many things, which it is not. Have a nice day.
CMS_Flash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CMS_Flash »

RoomyEmphasis wrote: Sat Jan 23, 2021 12:12 am
Marseille07 wrote: Fri Jan 22, 2021 8:51 pm
CMS_Flash wrote: Fri Jan 22, 2021 8:48 pm I'm actually okay with UPRO and TMF diving together in the short term, which wasn't very unusual in the past and probably won't be in the future. What I indeed worry about is the ability for TMF to continue delivering strong growth. With a close-to-zero interest rate, based on my limited understanding, TMF shouldn't be able to deliver any strong growth in the following decades. Correct me if I'm wrong since I really don't know much about the behavior of treasuries/bonds.
I think your understanding is correct. TMF doesn't have much upside but a lot of downside. Bonds didn't do well between 2015-2019 when the Fed was raising rates, for example.
There's a bunch of discussion on this about 20 pages back, which comes to a different conclusion than yours. Specifically relates to bond convexity. Just a heads-up. viewtopic.php?t=288192&start=6400
I think the notion of bond convexity is quite misleading here. I still believe the strong growth of TMF from the 80s to now relies heavily on the ~10% effective yield of LTT back then. The logic is:

1. If you hold a 30-year LTT for 30 years, you are destined to get the exact CAGR as the effective yield at the purchase date. So if the effective yield is 10% on the day of purchase, you get 10% CAGR after 30 years.
2. Alternatively, if you buy a 30-year LTT ETF, which is basically equivalent to rolling 30-year LTTs, you can still expect a high CAGR since: either 1) the effective yield stays at 10%, so you just get 10% CAGR consistently; or 2) the effective yield drops (or goes up), so the price of your LTT will go up (or drop), and you still get a high CAGR in the end.
3. In a different situation, if today's LTT rate is 1%, you will get 1% CAGR either holding an LTT for 30 years.
4. If you want to significantly outperform 1% CAGR holding an LTT ETF, your only hope is to experience further interest cuts (without getting back up), especially towards the end of your holding period.
5. Leveraging this up is even more dangerous. An asset with around 1% CAGR for the majority of the time will suffer greatly from volatility drag and ER.
6. Your only hope is consistent rate cuts through your 30-year holding period, which sounds unreal with a starting rate of 1%. You may go negative, but you can't go that far negative. I think a <-5% rate is unrealistic for any comprehensible economic environment. Also, in such an environment there might be other assets that make much better sense to hold than an LTT with a highly negative effective yield.

I'm happy if anyone can point out flaws in my logic. I currently really think TMF will do rather poorly in the coming decades. We may find a much better hedge against UPRO/TQQQ in the current economic environment.
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