HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
cogito
Posts: 249
Joined: Fri Nov 30, 2018 2:12 am

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

Post by cogito »

CMS_Flash wrote: Sun Jan 24, 2021 3:50 am
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.
Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

I have noticed some people using treasuries to replace TMF but usually with less aggressive portfolios. I am wondering about using futures to go more aggressive. Say something like 90% UPRO 10% Cash 810% 5 yr treasuries. That's a 25/75 portfolio leveraged 10.8 times. Its the equivalent of 60/40 UPRO/TMF leveraged 1.5x.

I like that UPRO (over emini contracts) rebalances daily so I have less to worry about. I will have to worry about the futures margin but 10% cash is about 3x the margin requirement for /ZF. I also have a 90% margin req for the UPRO so that is another 9% buffer before margin call. The drawdown in Jan was less than double the margin requirement so I wouldn't have been margin called but I would have had to sell some UPRO.

I feel like 90% UPRO might end up requiring too much babysitting and I might deleverage to 80-85 if it gets annoying.

Anyone try something this aggressive or have any tips about things to watch for? I'm just thinking of doing this as an experiment with a very small amount of my wealth.

Also is there a way to get delayed futures quotes into Google Sheets?
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

cogito wrote: Sun Jan 24, 2021 4:03 am
CMS_Flash wrote: Sun Jan 24, 2021 3:50 am
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.
Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Sun Jan 24, 2021 12:47 pm I have noticed some people using treasuries to replace TMF but usually with less aggressive portfolios. I am wondering about using futures to go more aggressive. Say something like 90% UPRO 10% Cash 810% 5 yr treasuries. That's a 25/75 portfolio leveraged 10.8 times. Its the equivalent of 60/40 UPRO/TMF leveraged 1.5x.

I like that UPRO (over emini contracts) rebalances daily so I have less to worry about. I will have to worry about the futures margin but 10% cash is about 3x the margin requirement for /ZF. I also have a 90% margin req for the UPRO so that is another 9% buffer before margin call. The drawdown in Jan was less than double the margin requirement so I wouldn't have been margin called but I would have had to sell some UPRO.

I feel like 90% UPRO might end up requiring too much babysitting and I might deleverage to 80-85 if it gets annoying.

Anyone try something this aggressive or have any tips about things to watch for? I'm just thinking of doing this as an experiment with a very small amount of my wealth.

Also is there a way to get delayed futures quotes into Google Sheets?
I'd like to learn about more aggressive strategies. Do you have a backtest available to give a rough idea on its performance?
perfectuncertainty
Posts: 243
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

Anyone use a minimum variance model that looks across 4 or more stocks, including TMF, and only selects 3 each month?

For example: TECL CURE UPRO TMF.

Interesting results :-)
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Ramjet
Posts: 704
Joined: Thu Feb 06, 2020 11:45 am
Location: Cleveland

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

Post by Ramjet »

CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm
cogito wrote: Sun Jan 24, 2021 4:03 am
CMS_Flash wrote: Sun Jan 24, 2021 3:50 am
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.
Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Sun Jan 24, 2021 2:18 pm
mr_mac3 wrote: Sun Jan 24, 2021 12:47 pm I have noticed some people using treasuries to replace TMF but usually with less aggressive portfolios. I am wondering about using futures to go more aggressive. Say something like 90% UPRO 10% Cash 810% 5 yr treasuries. That's a 25/75 portfolio leveraged 10.8 times. Its the equivalent of 60/40 UPRO/TMF leveraged 1.5x.

I like that UPRO (over emini contracts) rebalances daily so I have less to worry about. I will have to worry about the futures margin but 10% cash is about 3x the margin requirement for /ZF. I also have a 90% margin req for the UPRO so that is another 9% buffer before margin call. The drawdown in Jan was less than double the margin requirement so I wouldn't have been margin called but I would have had to sell some UPRO.

I feel like 90% UPRO might end up requiring too much babysitting and I might deleverage to 80-85 if it gets annoying.

Anyone try something this aggressive or have any tips about things to watch for? I'm just thinking of doing this as an experiment with a very small amount of my wealth.

Also is there a way to get delayed futures quotes into Google Sheets?
I'd like to learn about more aggressive strategies. Do you have a backtest available to give a rough idea on its performance?
I can give you some backtests but I am pretty skeptical. Here are some backtests using duration adjusted allocations of TMF and two intermediate treasury funds that have durations fairly close to the current cheapest to deliver for the 5yr contract /ZF. IEI is the closest at 4.85 vs 4.34 for the 5 Yr. In any case they are pretty close. Intermediates term treasuries being better probably has to do with better Sharpe ratio and less expenses but my duration adjustment could also be off.

Here is another backtest using VFINX instead of UPRO that can go back further. I ran out of the trial on portfolio visualizer so I can't use the UPRO backtest data this thread generated. I am skeptical because the daily rebalancing of UPRO and the probable frequent rebalancing of treasuries through periods like 2008 or 2020 might drastically change the outcome. Perhaps trying 90/60 UPRO/TMF with the simulated data would give a better picture.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

Ramjet wrote: Sun Jan 24, 2021 3:11 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm
cogito wrote: Sun Jan 24, 2021 4:03 am
CMS_Flash wrote: Sun Jan 24, 2021 3:50 am
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.
Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Sun Jan 24, 2021 3:20 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:18 pm
mr_mac3 wrote: Sun Jan 24, 2021 12:47 pm I have noticed some people using treasuries to replace TMF but usually with less aggressive portfolios. I am wondering about using futures to go more aggressive. Say something like 90% UPRO 10% Cash 810% 5 yr treasuries. That's a 25/75 portfolio leveraged 10.8 times. Its the equivalent of 60/40 UPRO/TMF leveraged 1.5x.

I like that UPRO (over emini contracts) rebalances daily so I have less to worry about. I will have to worry about the futures margin but 10% cash is about 3x the margin requirement for /ZF. I also have a 90% margin req for the UPRO so that is another 9% buffer before margin call. The drawdown in Jan was less than double the margin requirement so I wouldn't have been margin called but I would have had to sell some UPRO.

I feel like 90% UPRO might end up requiring too much babysitting and I might deleverage to 80-85 if it gets annoying.

Anyone try something this aggressive or have any tips about things to watch for? I'm just thinking of doing this as an experiment with a very small amount of my wealth.

Also is there a way to get delayed futures quotes into Google Sheets?
I'd like to learn about more aggressive strategies. Do you have a backtest available to give a rough idea on its performance?
I can give you some backtests but I am pretty skeptical. Here are some backtests using duration adjusted allocations of TMF and two intermediate treasury funds that have durations fairly close to the current cheapest to deliver for the 5yr contract /ZF. IEI is the closest at 4.85 vs 4.34 for the 5 Yr. In any case they are pretty close. Intermediates term treasuries being better probably has to do with better Sharpe ratio and less expenses but my duration adjustment could also be off.

Here is another backtest using VFINX instead of UPRO that can go back further. I ran out of the trial on portfolio visualizer so I can't use the UPRO backtest data this thread generated. I am skeptical because the daily rebalancing of UPRO and the probable frequent rebalancing of treasuries through periods like 2008 or 2020 might drastically change the outcome. Perhaps trying 90/60 UPRO/TMF with the simulated data would give a better picture.
If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Marseille07
Posts: 2324
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm
Ramjet wrote: Sun Jan 24, 2021 3:11 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm
cogito wrote: Sun Jan 24, 2021 4:03 am
CMS_Flash wrote: Sun Jan 24, 2021 3:50 am
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.
Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm
If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
I tried out using the simulated data, it wasn't as nice. There was a 90% drawdown in 08. The intermediate treasuries were a much better hedge than long term treasuries during the Dot Com Bust and Great Financial Crisis. It makes a big difference with this amount of leverage. I really need to get some daily treasury data and use that.

Edit: Dumb me, I only tried out the equivalent UPRO/TMF portfolio, not UPRO/VFITX. That does much better, CAGR 29.97%, std dev 45.74%, max drawdown -85.46%.

CASHX should simulate the implied borrowing cost of the future I believe.
Last edited by mr_mac3 on Sun Jan 24, 2021 7:51 pm, edited 1 time in total.
DMoogle
Posts: 64
Joined: Sat Oct 31, 2020 10:24 pm

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

Post by DMoogle »

mr_mac3 wrote: Sun Jan 24, 2021 4:27 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm
Ramjet wrote: Sun Jan 24, 2021 3:11 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm
cogito wrote: Sun Jan 24, 2021 4:03 am

Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
On a related note, assuming rates are stable, what should we expect the expected return of TMF to be?
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coingaroo
Posts: 98
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
Not the original commentator, but it is subjective. I've been into bitcoin for many years now, and even 93% drawdowns don't make me panic anymore.

As long as you invest for the long term and don't get emotional (I will admit most people do not fit in this category), high drawdowns like 80% don't matter. CAGR is the metric you want to optimise for; not Sharpe :)
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Sun Jan 24, 2021 4:27 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm
Ramjet wrote: Sun Jan 24, 2021 3:11 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm
cogito wrote: Sun Jan 24, 2021 4:03 am

Personally I think rates will remain relatively unchanged for at least a decade. Anything greater would bankrupt the US treasury at this point.
And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Sun Jan 24, 2021 4:55 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm
If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
I tried out using the simulated data, it wasn't as nice. There was a 90% drawdown in 08. The intermediate treasuries were a much better hedge than long term treasuries during the Dot Com Bust and Great Financial Crisis. It makes a big difference with this amount of leverage. I really need to get some daily treasury data and use that.

Edit: Dumb me, I only tried out the equivalent UPRO/TMF portfolio, not UPRO/VFITX. That does much better, CAGR 29.97%, std dev 45.74%, max drawdown -85.46%.

CASHX should simulate the implied borrowing cost of the future I believe.
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

DMoogle wrote: Sun Jan 24, 2021 5:14 pm
mr_mac3 wrote: Sun Jan 24, 2021 4:27 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm
Ramjet wrote: Sun Jan 24, 2021 3:11 pm
CMS_Flash wrote: Sun Jan 24, 2021 2:16 pm

And a constant low rate will mean very poor performance for TMF, is that correct?
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
On a related note, assuming rates are stable, what should we expect the expected return of TMF to be?
I think it's highly dependent on volatility. If growth is perfectly exponential, then TMF will deliver exactly 3X the rate minus borrowing cost and ER. But with volatility it could easily go nominally negative.
Marseille07
Posts: 2324
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

coingaroo wrote: Sun Jan 24, 2021 11:56 pm
Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
Not the original commentator, but it is subjective. I've been into bitcoin for many years now, and even 93% drawdowns don't make me panic anymore.

As long as you invest for the long term and don't get emotional (I will admit most people do not fit in this category), high drawdowns like 80% don't matter. CAGR is the metric you want to optimise for; not Sharpe :)
Your game is different than mine. If you're long US stocks then there's a high chance you can hold it out. But something like BTC, the price may never recover and you might be holding the bag forever.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
I don't care about drawdowns as long as CAGR can recover. Also I'm early in career so even if I get a 100% drawdown tomorrow it's merely pushing my retirement back by a couple of years.

95% could be alarming though. Such a drawdown could trigger fund closure and force me to maintain daily leverage on my own tediously.
Marseille07
Posts: 2324
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

CMS_Flash wrote: Mon Jan 25, 2021 12:31 am
Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
I don't care about drawdowns as long as CAGR can recover. Also I'm early in career so even if I get a 100% drawdown tomorrow it's merely pushing my retirement back by a couple of years.

95% could be alarming though. Such a drawdown could trigger fund closure and force me to maintain daily leverage on my own tediously.
I remember someone saying that you can simply switch to something comparable, like UPRO -> SPXL or TQQQ.
Semantics
Posts: 228
Joined: Tue Mar 10, 2020 1:42 pm

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

Post by Semantics »

CMS_Flash wrote: Mon Jan 25, 2021 12:21 am
DMoogle wrote: Sun Jan 24, 2021 5:14 pm
mr_mac3 wrote: Sun Jan 24, 2021 4:27 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm
Ramjet wrote: Sun Jan 24, 2021 3:11 pm
TMF is there to protect against stock market crashes

Constant low rates also mean low borrowing rates

Have you read part 1, particularly the summary on the first page? OP thinks rates will remain low for decades. The strategy depends on it
I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
On a related note, assuming rates are stable, what should we expect the expected return of TMF to be?
I think it's highly dependent on volatility. If growth is perfectly exponential, then TMF will deliver exactly 3X the rate minus borrowing cost and ER. But with volatility it could easily go nominally negative.
A possibly useful data point is that TMF returned 1.53% CAGR from 2012-2018, during which the 30-year yield started and ended at around 2.9% (borrowing rates did rise during the last two years of that period, fwiw). The 30-year yield is about 1.9% now. So I would not be surprised if returns are slightly negative for the next while.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

Semantics wrote: Mon Jan 25, 2021 12:34 am
CMS_Flash wrote: Mon Jan 25, 2021 12:21 am
DMoogle wrote: Sun Jan 24, 2021 5:14 pm
mr_mac3 wrote: Sun Jan 24, 2021 4:27 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:39 pm

I did read parts 1 & 2. Sure a low rate would mean low borrowing cost, but a constant low rate will also mean weak growth of LTT. Minus ER and volatility drag TMF might give a negative CAGR. Probably there would be a better hedge asset in this situation? LTT or something else?
If you trust modern portfolio theory you can use the correlations and returns from historical data and solve for the Sharpe optimal allocation. Then adjust the returns to what you expect. Using the data from 2010-2020 (UPRO Avg Return 44.09%, Std dev 44.14%; TMF Avg Return 24.57%, Std dev 39.17%; Correlation -0.45) the Sharpe optimal portfolio is 51/49 UPRO/TMF. Now suppose I thought TMF would have 0 expected return (so a negative CAGR) and the risk free rate was 0.3% but the variances and correlations stay the same. If my math is correct, the Sharpe optimal portfolio is 80/20, still a significant chunk with that pessimistic prediction.
On a related note, assuming rates are stable, what should we expect the expected return of TMF to be?
I think it's highly dependent on volatility. If growth is perfectly exponential, then TMF will deliver exactly 3X the rate minus borrowing cost and ER. But with volatility it could easily go nominally negative.
A possibly useful data point is that TMF returned 1.53% CAGR from 2012-2018, during which the 30-year yield started and ended at around 2.9% (borrowing rates did rise during the last two years of that period, fwiw). The 30-year yield is about 1.9% now. So I would not be surprised if returns are slightly negative for the next while.
Agreed. I might do some rough simulation and post the results if I can find time.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

Marseille07 wrote: Mon Jan 25, 2021 12:32 am
CMS_Flash wrote: Mon Jan 25, 2021 12:31 am
Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
I don't care about drawdowns as long as CAGR can recover. Also I'm early in career so even if I get a 100% drawdown tomorrow it's merely pushing my retirement back by a couple of years.

95% could be alarming though. Such a drawdown could trigger fund closure and force me to maintain daily leverage on my own tediously.
I remember someone saying that you can simply switch to something comparable, like UPRO -> SPXL or TQQQ.
SPXL is essentially another UPRO right? TQQQ delivered more return in the past, but I haven't fully convinced myself that it will continue to do so for 3 or 4 more decades. I admit it's been tempting though, I plan to investigate more thoroughly before I commit.
Marseille07
Posts: 2324
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

CMS_Flash wrote: Mon Jan 25, 2021 12:38 am
Marseille07 wrote: Mon Jan 25, 2021 12:32 am
CMS_Flash wrote: Mon Jan 25, 2021 12:31 am
Marseille07 wrote: Sun Jan 24, 2021 4:02 pm
CMS_Flash wrote: Sun Jan 24, 2021 3:57 pm If you run out of the trial you can either pay or register a new account. I think it's important to do longer-term back test since 2010-now has been a big bull market. It's nice to see in the second back test that drawdown around 2008 is only 80% for this aggressive strategy.

BTW, by using a negative allocation to cash, did you take into consideration the borrowing cost?
Only 80%? Are you kidding me? Do you really understand how big that is?
I don't care about drawdowns as long as CAGR can recover. Also I'm early in career so even if I get a 100% drawdown tomorrow it's merely pushing my retirement back by a couple of years.

95% could be alarming though. Such a drawdown could trigger fund closure and force me to maintain daily leverage on my own tediously.
I remember someone saying that you can simply switch to something comparable, like UPRO -> SPXL or TQQQ.
SPXL is essentially another UPRO right? TQQQ delivered more return in the past, but I haven't fully convinced myself that it will continue to do so for 3 or 4 more decades. I admit it's been tempting though, I plan to investigate more thoroughly before I commit.
Right. I was just speaking of a situation where UPRO shuts down and you needed something else, not suggesting you should switch today.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

Marseille07 wrote: Mon Jan 25, 2021 12:46 am
CMS_Flash wrote: Mon Jan 25, 2021 12:38 am
Marseille07 wrote: Mon Jan 25, 2021 12:32 am
CMS_Flash wrote: Mon Jan 25, 2021 12:31 am
Marseille07 wrote: Sun Jan 24, 2021 4:02 pm

Only 80%? Are you kidding me? Do you really understand how big that is?
I don't care about drawdowns as long as CAGR can recover. Also I'm early in career so even if I get a 100% drawdown tomorrow it's merely pushing my retirement back by a couple of years.

95% could be alarming though. Such a drawdown could trigger fund closure and force me to maintain daily leverage on my own tediously.
I remember someone saying that you can simply switch to something comparable, like UPRO -> SPXL or TQQQ.
SPXL is essentially another UPRO right? TQQQ delivered more return in the past, but I haven't fully convinced myself that it will continue to do so for 3 or 4 more decades. I admit it's been tempting though, I plan to investigate more thoroughly before I commit.
Right. I was just speaking of a situation where UPRO shuts down and you needed something else, not suggesting you should switch today.
Got your point. If market crashes hard enough, similar products may all shut down though. It's a risk I'll keep in mind but won't prevent me from implementing the strategy.
perfectuncertainty
Posts: 243
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

Sold all my QLD (owned it since 2010) today. A very happy day. But kinda sad to see my buddy go. Covered my UPRO and TMF too. I'm staying out till the COVID dust clears.

Only got VIX calls. Loaded. Happy to take a loss on this because there is more to life than trading.
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Mon Jan 25, 2021 12:13 am
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.
CMS_Flash wrote: Mon Jan 25, 2021 12:16 am
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Mon Jan 25, 2021 12:01 pm
CMS_Flash wrote: Mon Jan 25, 2021 12:13 am
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.
CMS_Flash wrote: Mon Jan 25, 2021 12:16 am
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
I think a big difference between 675% VFITX and actually leveraged treasury funds is that it doesn't do daily reset. Daily reset is what makes leverage super costly when long-term growth is weak.

So I guess what I was suggesting was the TMF, or any daily leveraged treasury ETF won't be a good hedge asset. Alternatively, we can for example use unleveraged treasuries, or long-term leveraged treasuries.

For short- vs long-term treasuries, are you suggesting that short- or mid-term treasuries are more negatively correlated with the market?
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Mon Jan 25, 2021 3:54 pm
mr_mac3 wrote: Mon Jan 25, 2021 12:01 pm
CMS_Flash wrote: Mon Jan 25, 2021 12:13 am
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.
CMS_Flash wrote: Mon Jan 25, 2021 12:16 am
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
I think a big difference between 675% VFITX and actually leveraged treasury funds is that it doesn't do daily reset. Daily reset is what makes leverage super costly when long-term growth is weak.

So I guess what I was suggesting was the TMF, or any daily leveraged treasury ETF won't be a good hedge asset. Alternatively, we can for example use unleveraged treasuries, or long-term leveraged treasuries.

For short- vs long-term treasuries, are you suggesting that short- or mid-term treasuries are more negatively correlated with the market?
I can replaced TMF with an unleveraged long term treasury fund and it still underperforms relative to intermediate. I don't think the daily releveraging is the problem.

The issue regarding TMF vs unleveraged treasuries has been in order to get the right proportion of stocks to bonds, you have to give up some UPRO space for the unleveraged treasuries. You could try EDV or TLT but you'll have a lot less UPRO. You could go into futures as I have suggested but that is less convenient to manage. However, if you can make it work, you'll reduce your expenses and improve your hedge.

I am only suggesting that shorter term treasuries results in a better portfolio Sharpe ratio. I think this has more to do with differences in risk adjusted returns between treasury durations than differences in correlations with equities. In fact, looking at the correlations it seems long term treasuries are more negatively correlated than intermediate term treasuries.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Mon Jan 25, 2021 5:21 pm
CMS_Flash wrote: Mon Jan 25, 2021 3:54 pm
mr_mac3 wrote: Mon Jan 25, 2021 12:01 pm
CMS_Flash wrote: Mon Jan 25, 2021 12:13 am
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.
CMS_Flash wrote: Mon Jan 25, 2021 12:16 am
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
I think a big difference between 675% VFITX and actually leveraged treasury funds is that it doesn't do daily reset. Daily reset is what makes leverage super costly when long-term growth is weak.

So I guess what I was suggesting was the TMF, or any daily leveraged treasury ETF won't be a good hedge asset. Alternatively, we can for example use unleveraged treasuries, or long-term leveraged treasuries.

For short- vs long-term treasuries, are you suggesting that short- or mid-term treasuries are more negatively correlated with the market?
I can replaced TMF with an unleveraged long term treasury fund and it still underperforms relative to intermediate. I don't think the daily releveraging is the problem.

The issue regarding TMF vs unleveraged treasuries has been in order to get the right proportion of stocks to bonds, you have to give up some UPRO space for the unleveraged treasuries. You could try EDV or TLT but you'll have a lot less UPRO. You could go into futures as I have suggested but that is less convenient to manage. However, if you can make it work, you'll reduce your expenses and improve your hedge.

I am only suggesting that shorter term treasuries results in a better portfolio Sharpe ratio. I think this has more to do with differences in risk adjusted returns between treasury durations than differences in correlations with equities. In fact, looking at the correlations it seems long term treasuries are more negatively correlated than intermediate term treasuries.
So are you basically suggesting that intermediate treasuries have better risk-adjusted returns than long-term treasuries?

On daily resets, I think it is at least partly the reason why TMF won't be a good hedge. Daily resets cause big drags when volatility is high w.r.t. growth.
kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

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

Post by kjm »

perfectuncertainty wrote: Sun Jan 24, 2021 2:41 pm Anyone use a minimum variance model that looks across 4 or more stocks, including TMF, and only selects 3 each month?

For example: TECL CURE UPRO TMF.

Interesting results :-)
Something like that. I picked TQQQ and TNA because they represent different style factors...

https://bit.ly/2M7UYU9

What's also interesting is picking two loosely correlated sectors instead of UPRO for a fixed portfolio. Say, tech and utilities. Better CAGR and better risk metrics...

https://bit.ly/3oe7pLn
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Mon Jan 25, 2021 7:07 pm
mr_mac3 wrote: Mon Jan 25, 2021 5:21 pm
CMS_Flash wrote: Mon Jan 25, 2021 3:54 pm
mr_mac3 wrote: Mon Jan 25, 2021 12:01 pm
CMS_Flash wrote: Mon Jan 25, 2021 12:13 am
If what I expect is near-zero return for LTT (say 1%), TMF could go quite significantly negative. It scored -10% CAGR 1955-1982 in a rising-rate environment. I'm assuming it could give -2~3% in a constant near-zero environment based on mere intuition. I haven't calculated the actual number, so my intuition might be wrong.

I do trust modern portfolio theory. Following your logic, with my assumptions I believe we'll have an even lower allocation for TMF.

Another point is that we are not forced to use TMF. There might be a better hedging asset than it.

BTW, which tool do you use to do Sharpe optimization?
I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.
CMS_Flash wrote: Mon Jan 25, 2021 12:16 am
Just to confirm VFITX isn't leveraged right?

Any intuition why intermediate notes are a better hedge?
VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
I think a big difference between 675% VFITX and actually leveraged treasury funds is that it doesn't do daily reset. Daily reset is what makes leverage super costly when long-term growth is weak.

So I guess what I was suggesting was the TMF, or any daily leveraged treasury ETF won't be a good hedge asset. Alternatively, we can for example use unleveraged treasuries, or long-term leveraged treasuries.

For short- vs long-term treasuries, are you suggesting that short- or mid-term treasuries are more negatively correlated with the market?
I can replaced TMF with an unleveraged long term treasury fund and it still underperforms relative to intermediate. I don't think the daily releveraging is the problem.

The issue regarding TMF vs unleveraged treasuries has been in order to get the right proportion of stocks to bonds, you have to give up some UPRO space for the unleveraged treasuries. You could try EDV or TLT but you'll have a lot less UPRO. You could go into futures as I have suggested but that is less convenient to manage. However, if you can make it work, you'll reduce your expenses and improve your hedge.

I am only suggesting that shorter term treasuries results in a better portfolio Sharpe ratio. I think this has more to do with differences in risk adjusted returns between treasury durations than differences in correlations with equities. In fact, looking at the correlations it seems long term treasuries are more negatively correlated than intermediate term treasuries.
So are you basically suggesting that intermediate treasuries have better risk-adjusted returns than long-term treasuries?

On daily resets, I think it is at least partly the reason why TMF won't be a good hedge. Daily resets cause big drags when volatility is high w.r.t. growth.
As far as I know, yes.

I'm not sure I have a problem with daily rebalancing. Merton's intertemporal asset allocation problem has one releveraging and rebalancing every instant. However, if it is a problem, you can rebalance however frequently you like with futures, you just have to deal with the large contract sizes.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

mr_mac3 wrote: Mon Jan 25, 2021 9:56 pm
CMS_Flash wrote: Mon Jan 25, 2021 7:07 pm
mr_mac3 wrote: Mon Jan 25, 2021 5:21 pm
CMS_Flash wrote: Mon Jan 25, 2021 3:54 pm
mr_mac3 wrote: Mon Jan 25, 2021 12:01 pm

I would be happy to include something else, if it can be found. The negative correlation between treasuries and equities is rather special from what I know. You could get some improvement by moving to lower duration treasuries and increasing leverage.

I usually use portfolio visualizer but to do the calculation above I just put the formula into wolfram alpha.



VFITX itself is not leveraged, its just intermediate term treasuries, but in the portfolio I have 90/675 UPRO/VFITX.

As to why intermediate treasuries are a better hedge, my understanding is that it is similar to the "betting against beta" phenomena. People don't like leverage so they use longer duration as a substitute, bringing down the risk-adjusted returns. Usually short term treasuries are even better, the back tests would do better with something like 85% short term, 5% long term, 10% stock. I picked intermediates over short term because of how low rates are now and the slope of the yield curve makes it more profitable to increase the duration.
I think a big difference between 675% VFITX and actually leveraged treasury funds is that it doesn't do daily reset. Daily reset is what makes leverage super costly when long-term growth is weak.

So I guess what I was suggesting was the TMF, or any daily leveraged treasury ETF won't be a good hedge asset. Alternatively, we can for example use unleveraged treasuries, or long-term leveraged treasuries.

For short- vs long-term treasuries, are you suggesting that short- or mid-term treasuries are more negatively correlated with the market?
I can replaced TMF with an unleveraged long term treasury fund and it still underperforms relative to intermediate. I don't think the daily releveraging is the problem.

The issue regarding TMF vs unleveraged treasuries has been in order to get the right proportion of stocks to bonds, you have to give up some UPRO space for the unleveraged treasuries. You could try EDV or TLT but you'll have a lot less UPRO. You could go into futures as I have suggested but that is less convenient to manage. However, if you can make it work, you'll reduce your expenses and improve your hedge.

I am only suggesting that shorter term treasuries results in a better portfolio Sharpe ratio. I think this has more to do with differences in risk adjusted returns between treasury durations than differences in correlations with equities. In fact, looking at the correlations it seems long term treasuries are more negatively correlated than intermediate term treasuries.
So are you basically suggesting that intermediate treasuries have better risk-adjusted returns than long-term treasuries?

On daily resets, I think it is at least partly the reason why TMF won't be a good hedge. Daily resets cause big drags when volatility is high w.r.t. growth.
As far as I know, yes.

I'm not sure I have a problem with daily rebalancing. Merton's intertemporal asset allocation problem has one releveraging and rebalancing every instant. However, if it is a problem, you can rebalance however frequently you like with futures, you just have to deal with the large contract sizes.
Interesting. It contradicts my intuition of the effect of frequent leverage resets. Do you have a pointer towards a tutorial on the theory behind? (Say the Merton problem?)

I do want to avoid the headaches of futures for contract size and mental burdens. Anyways, thank you for the fruitful discussion!
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

kjm wrote: Mon Jan 25, 2021 9:06 pm
perfectuncertainty wrote: Sun Jan 24, 2021 2:41 pm Anyone use a minimum variance model that looks across 4 or more stocks, including TMF, and only selects 3 each month?

For example: TECL CURE UPRO TMF.

Interesting results :-)
Something like that. I picked TQQQ and TNA because they represent different style factors...

https://bit.ly/2M7UYU9

What's also interesting is picking two loosely correlated sectors instead of UPRO for a fixed portfolio. Say, tech and utilities. Better CAGR and better risk metrics...

https://bit.ly/3oe7pLn
These all sound promising. But one beauty of the original HFEA is back tests since 1955. No one has done that for any sector-based strategy which is why I haven't convinced myself to dive in. (Not to say they are bad, but just less evidence to prove they're great.)
kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

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

Post by kjm »

These all sound promising. But one beauty of the original HFEA is back tests since 1955. No one has done that for any sector-based strategy which is why I haven't convinced myself to dive in. (Not to say they are bad, but just less evidence to prove they're great.)
I understand your hesitation. You can get a longer sample by using 1x funds and compare to 55% SPY / 45% TLT. Not 65 years of data though.

Using the ‘Backtest Asset Allocation’ feature you can go all the way to the 70’s. It’s clear holding 2 “opposite” style factors - large cap growth and small cap value - beats holding the whole market. Presumably because each performs differently under different macro conditions and you benefit from rebalancing when one outpaces the other.
taojaxx
Posts: 153
Joined: Wed Jul 18, 2012 8:25 pm

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

Post by taojaxx »

Speaking of sectors, and to alleviate jitters about TMF in a rising rate environment, has anyone looked into allocating a portion of both UPRO and TMF to FAS (3X Financials)?
Financials do well in rising rates/Steepening curve environments. Back testing confirms 55/25/20 or 45/35/20 UPRO/TMF/FAS is close to 55/45 in falling rates and outperforms in rising rates, which might be in our future. Original strategy blows up if rates rise. A dash of FAS makes it more robust. Not bullet proof but sturdier with similar or higher CAGR.
chrisdds98
Posts: 160
Joined: Tue May 19, 2015 9:55 pm
Location: Austin, TX

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

Post by chrisdds98 »

Hey guys, can you recommend a brokerage for this strategy? I use M1 now but apparently they can't do partial roth conversions (https://www.kitces.com/blog/using-syste ... t-buckets/)

something with an easy rebalance feature would be nice! When I rebalance on fidelity its a bit of a pain.
User avatar
Ramjet
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Location: Cleveland

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

Post by Ramjet »

chrisdds98 wrote: Tue Jan 26, 2021 11:41 am Hey guys, can you recommend a brokerage for this strategy? I use M1 now but apparently they can't do partial roth conversions (https://www.kitces.com/blog/using-syste ... t-buckets/)

something with an easy rebalance feature would be nice! When I rebalance on fidelity its a bit of a pain.
Partial ROTH conversion or transfer? I have made several partial ROTH transfers to M1
chrisdds98
Posts: 160
Joined: Tue May 19, 2015 9:55 pm
Location: Austin, TX

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

Post by chrisdds98 »

Ramjet wrote: Tue Jan 26, 2021 11:51 am
chrisdds98 wrote: Tue Jan 26, 2021 11:41 am Hey guys, can you recommend a brokerage for this strategy? I use M1 now but apparently they can't do partial roth conversions (https://www.kitces.com/blog/using-syste ... t-buckets/)

something with an easy rebalance feature would be nice! When I rebalance on fidelity its a bit of a pain.
Partial ROTH conversion or transfer? I have made several partial ROTH transfers to M1
conversions. my traditional is much larger then my roth and I would like to have UPRO and TMF in that as well while being able to do partial conversions every year
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

kjm wrote: Tue Jan 26, 2021 9:07 am
These all sound promising. But one beauty of the original HFEA is back tests since 1955. No one has done that for any sector-based strategy which is why I haven't convinced myself to dive in. (Not to say they are bad, but just less evidence to prove they're great.)
I understand your hesitation. You can get a longer sample by using 1x funds and compare to 55% SPY / 45% TLT. Not 65 years of data though.

Using the ‘Backtest Asset Allocation’ feature you can go all the way to the 70’s. It’s clear holding 2 “opposite” style factors - large cap growth and small cap value - beats holding the whole market. Presumably because each performs differently under different macro conditions and you benefit from rebalancing when one outpaces the other.
I did a preliminary back test for totals stock vs 50/50 large growth/small value. Seems the latter won out by 2% CAGR and slightly higher risk.

I think it intuitively makes sense. But when leveraging up with daily resets the behavior might change, due to reasons like the higher daily volatility of most sectors (say small value or tech) than the total market.

Another uncertainty is with the implementation of specific funds. Almost every S&P 500 ETF gives the exact same return. But different small-cap value ETFs may behave very differently. We also need to build confidence in the ability of the specific fund to execute the sector right.

My main point is that turning an idea to a solid strategy that I can comfortably hold through an 80% drawdown requires thorough investigation. I like risk, but not uncertainty. The collective effort people put into HFEA in this thread has squeezed the uncertainty very effectively. I am very interested in alternatives with higher return, even at a higher risk. But I think we need to put in some more efforts to work out the uncertainty. I will very happily make some contribution in process. If I got time maybe I can try to build a daily leverage simulation of a few sectors (maybe start with TQQQ) based on the same methodology of the OP's UPRO simulation, which could be a good starting point.
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

taojaxx wrote: Tue Jan 26, 2021 10:30 am Speaking of sectors, and to alleviate jitters about TMF in a rising rate environment, has anyone looked into allocating a portion of both UPRO and TMF to FAS (3X Financials)?
Financials do well in rising rates/Steepening curve environments. Back testing confirms 55/25/20 or 45/35/20 UPRO/TMF/FAS is close to 55/45 in falling rates and outperforms in rising rates, which might be in our future. Original strategy blows up if rates rise. A dash of FAS makes it more robust. Not bullet proof but sturdier with similar or higher CAGR.
Very interesting point. I think it's worth looking into. How far back did you test and which were the rising-rate periods you are referring to?
taojaxx
Posts: 153
Joined: Wed Jul 18, 2012 8:25 pm

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

Post by taojaxx »

CMS_Flash wrote: Tue Jan 26, 2021 3:03 pm
taojaxx wrote: Tue Jan 26, 2021 10:30 am Speaking of sectors, and to alleviate jitters about TMF in a rising rate environment, has anyone looked into allocating a portion of both UPRO and TMF to FAS (3X Financials)?
Financials do well in rising rates/Steepening curve environments. Back testing confirms 55/25/20 or 45/35/20 UPRO/TMF/FAS is close to 55/45 in falling rates and outperforms in rising rates, which might be in our future. Original strategy blows up if rates rise. A dash of FAS makes it more robust. Not bullet proof but sturdier with similar or higher CAGR.
Very interesting point. I think it's worth looking into. How far back did you test and which were the rising-rate periods you are referring to?
Just used Portfolio Visualizer so went back till UPRO started, so July 2009. Rates rose july 2010 to August 2011, March 2013 to Jan 2016, Sep 2017 to Nov 2018 (out performance extended till Feb 2020 where the Fed pulled the rug) and August 2020 to today.
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 »

CMS_Flash wrote: Tue Jan 26, 2021 3:03 pm
taojaxx wrote: Tue Jan 26, 2021 10:30 am Speaking of sectors, and to alleviate jitters about TMF in a rising rate environment, has anyone looked into allocating a portion of both UPRO and TMF to FAS (3X Financials)?
Financials do well in rising rates/Steepening curve environments. Back testing confirms 55/25/20 or 45/35/20 UPRO/TMF/FAS is close to 55/45 in falling rates and outperforms in rising rates, which might be in our future. Original strategy blows up if rates rise. A dash of FAS makes it more robust. Not bullet proof but sturdier with similar or higher CAGR.
Very interesting point. I think it's worth looking into. How far back did you test and which were the rising-rate periods you are referring to?
I haven't backtested, but adding FAS as a rising-rates hedge could also help diversify for those on the TQQQ variation (as NASDAQ-100 excludes financials).
CMS_Flash
Posts: 44
Joined: Tue Dec 29, 2020 8:26 pm

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

Post by CMS_Flash »

BayStater wrote: Tue Jan 26, 2021 4:31 pm
CMS_Flash wrote: Tue Jan 26, 2021 3:03 pm
taojaxx wrote: Tue Jan 26, 2021 10:30 am Speaking of sectors, and to alleviate jitters about TMF in a rising rate environment, has anyone looked into allocating a portion of both UPRO and TMF to FAS (3X Financials)?
Financials do well in rising rates/Steepening curve environments. Back testing confirms 55/25/20 or 45/35/20 UPRO/TMF/FAS is close to 55/45 in falling rates and outperforms in rising rates, which might be in our future. Original strategy blows up if rates rise. A dash of FAS makes it more robust. Not bullet proof but sturdier with similar or higher CAGR.
Very interesting point. I think it's worth looking into. How far back did you test and which were the rising-rate periods you are referring to?
I haven't backtested, but adding FAS as a rising-rates hedge could also help diversify for those on the TQQQ variation (as NASDAQ-100 excludes financials).
Great point. I'm considering the TQQQ variant. FAS would be nice.
Ralphmacchiokick
Posts: 2
Joined: Tue Jan 26, 2021 10:03 am

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

Post by Ralphmacchiokick »

I've been reading this blog off and on for a while now, I"m into PSLDX, but i'm concerned about long term inflation from all the stimulus leading to TMF struggles, as well as in the short term, an over valuation of US equities combined with likely less pro-business policy from the current administration.

I want to swing my profile heavily into a chinese/emerging market equivalent of this theory, YINN and something else, but I can't find a way to recreate the 3x chinese BOND ETF.

I strongly believe in a need to maintain equivalent portions of each countries equities/bonds to ensure central banks keep the strategy solid.

Does anyone have any theories on how to run this for China/India?
kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

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

Post by kjm »

CMS_Flash wrote: Tue Jan 26, 2021 2:58 pm
kjm wrote: Tue Jan 26, 2021 9:07 am
These all sound promising. But one beauty of the original HFEA is back tests since 1955. No one has done that for any sector-based strategy which is why I haven't convinced myself to dive in. (Not to say they are bad, but just less evidence to prove they're great.)
I understand your hesitation. You can get a longer sample by using 1x funds and compare to 55% SPY / 45% TLT. Not 65 years of data though.

Using the ‘Backtest Asset Allocation’ feature you can go all the way to the 70’s. It’s clear holding 2 “opposite” style factors - large cap growth and small cap value - beats holding the whole market. Presumably because each performs differently under different macro conditions and you benefit from rebalancing when one outpaces the other.
I did a preliminary back test for totals stock vs 50/50 large growth/small value. Seems the latter won out by 2% CAGR and slightly higher risk.

I think it intuitively makes sense. But when leveraging up with daily resets the behavior might change, due to reasons like the higher daily volatility of most sectors (say small value or tech) than the total market.

Another uncertainty is with the implementation of specific funds. Almost every S&P 500 ETF gives the exact same return. But different small-cap value ETFs may behave very differently. We also need to build confidence in the ability of the specific fund to execute the sector right.

My main point is that turning an idea to a solid strategy that I can comfortably hold through an 80% drawdown requires thorough investigation. I like risk, but not uncertainty. The collective effort people put into HFEA in this thread has squeezed the uncertainty very effectively. I am very interested in alternatives with higher return, even at a higher risk. But I think we need to put in some more efforts to work out the uncertainty. I will very happily make some contribution in process. If I got time maybe I can try to build a daily leverage simulation of a few sectors (maybe start with TQQQ) based on the same methodology of the OP's UPRO simulation, which could be a good starting point.
Not sure which funds you picked exactly, but you can take 1x funds back to 1978...

https://bit.ly/2Ygsz0T

25% large cap growth, 25% small cap value and 50% long term treasuries. This beats the 55/45 split in every metric. However, two I care about are CAGR and max drawdown.

I do acknowledge the the 1x results may not translate as expected to leveraged ETFs. And, that's a fair point about individual style factors or sectors being more volatile than the market overall.

I'm not trying to convince anyone to do anything. Just trying to figure out how I want to implement an HFEA-like approach. I figure if you're going to dedicate a portion of your portfolio to something like this, you might as well swing for the fences.
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

CMS_Flash wrote: Tue Jan 26, 2021 1:21 am Interesting. It contradicts my intuition of the effect of frequent leverage resets. Do you have a pointer towards a tutorial on the theory behind? (Say the Merton problem?)

I do want to avoid the headaches of futures for contract size and mental burdens. Anyways, thank you for the fruitful discussion!
I don't know of any good tutorials or other materials. My intuition is that the stationarity of the market process means that:

suppose 200% leverage is optimal yesterday and

today there is a crash so that leverage goes up to, say, 220%, then

by stationarity the future from today looks exactly the same as it did yesterday except I'm a bit poorer

that plus CRRA preferences should mean I should still want 200% leverage.

Things like transactions costs and taxes will make you want to wait to rebalance until you drift far enough away for it to be worth it. Maybe daily is too often given the transaction costs, idk. The other reason you might not want to rebalance is you don't believe daily returns are uncorrelated. Some think stocks are more likely to go up after a drawdown.
mr_mac3
Posts: 18
Joined: Fri Apr 03, 2020 8:09 pm

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

Post by mr_mac3 »

Ralphmacchiokick wrote: Tue Jan 26, 2021 8:34 pm I've been reading this blog off and on for a while now, I"m into PSLDX, but i'm concerned about long term inflation from all the stimulus leading to TMF struggles, as well as in the short term, an over valuation of US equities combined with likely less pro-business policy from the current administration.

I want to swing my profile heavily into a chinese/emerging market equivalent of this theory, YINN and something else, but I can't find a way to recreate the 3x chinese BOND ETF.

I strongly believe in a need to maintain equivalent portions of each countries equities/bonds to ensure central banks keep the strategy solid.

Does anyone have any theories on how to run this for China/India?
If you find a way to leverage Chinese bonds I have some friends that are interested.
taojaxx
Posts: 153
Joined: Wed Jul 18, 2012 8:25 pm

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

Post by taojaxx »

mr_mac3 wrote: Tue Jan 26, 2021 10:55 pm If you find a way to leverage Chinese bonds I have some friends that are interested.
CBON ETF on margin. Interactive Brokers has affordable margin rates.
chrisdds98
Posts: 160
Joined: Tue May 19, 2015 9:55 pm
Location: Austin, TX

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

Post by chrisdds98 »

chrisdds98 wrote: Tue Jan 26, 2021 12:00 pm
Ramjet wrote: Tue Jan 26, 2021 11:51 am
chrisdds98 wrote: Tue Jan 26, 2021 11:41 am Hey guys, can you recommend a brokerage for this strategy? I use M1 now but apparently they can't do partial roth conversions (https://www.kitces.com/blog/using-syste ... t-buckets/)

something with an easy rebalance feature would be nice! When I rebalance on fidelity its a bit of a pain.
Partial ROTH conversion or transfer? I have made several partial ROTH transfers to M1
conversions. my traditional is much larger then my roth and I would like to have UPRO and TMF in that as well while being able to do partial conversions every year
anyone? I can always use fidelity but there has to be a better option. would interactive brokers do partial roth conversions? do they have easy rebalancing?
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