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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Tue Feb 05, 2019 2:56 pm

[This topic has been continued in a new thread. See: HEDGEFUNDIE's excellent adventure Part II: The next journey --admin LadyGeek]

For newcomers to this thread, welcome! This adventure has already taken numerous twists and turns. If you’d like to catch up with the latest developments, I’d recommend you read this first post in its entirety, then skip directly to:

1. Post #1068 where I posted the 1955-2018 backtest, and

2. Post #3350 where I describe why I changed the asset allocation from 40/60 UPRO/TMF to 55/45 UPRO/TMF.


Inspired by market timer's famous thread on his leveraged lifecycle investment strategy during the financial crisis, I am starting a thread of my own on a risk parity strategy using 3x leveraged ETFs. This thread will be a documented record of my strategy. I intend to update the tracker below on a quarterly basis.

Tracker [updated Aug 12, 2019]
Image

02/2019: $100k
05/2019: $115k
08/2019: $133k
Mid 08/2019: $143k [strategy AA changed to 55/45]

What is your strategy?
I am young (33) and willing & able to take risk. For anyone in my position, one would recommend a large allocation to equities. But might there be a better way to hold those equities? Theoretically and historically, it can be shown that by holding an uncorrelated set of assets (e.g. S&P 500 & long Treasuries) and adding leverage, one can achieve better risk adjusted returns than by holding the S&P alone.

What is a leveraged ETF?
UPRO delivers 3x the daily performance of the S&P 500. It does this by holding 66% individual S&P 500 stocks, 222% total return swaps on the S&P 500, and 12% S&P futures. Add it all up, and you get exposure to 300% of the S&P 500’s daily performance.

Total return swaps are contracts between the ETF and major investment banks. Every day, the banks pay the ETF the value of the S&P 500’s total return (or in the case of TMF, the Long Term Treasury Index’s total return) for that day, and in return the ETF pays the banks a pre-negotiated fixed rate of interest, which is slightly higher than the short term treasury rate. The ETF also holds some cash to serve as collateral for the banks. Finally, like any other investment, an expense ratio is deducted.

How much does the leverage cost?
As described above, the leveraged ETFs for the strategy borrows money at a short term rate and invests it into the S&P 500 (in the case of UPRO) and long term Treasuries (in the case of TMF).

As of November 2018, the borrow rate of UPRO's swaps was 2.87%. This cost is on top of the 0.92% expense ratio.

As of October 2018, the borrow rate of TMF's swaps was 1.83%. This cost is on top of the 1.09% expense ratio.

What is the evidence supporting your strategy?
UPRO & TMF, the two ETFs I will use, only have a history of 10 years. EfficientInvestor has suggested a formula to simulate how these funds would have behaved in the past that takes into account the daily leverage reset, the cost of borrowing (1-month LIBOR)*, and the expense ratio:
the equation I currently have in my spreadsheet for daily performance of a leveraged ETF is:

(Daily % of underlying total return index) * X - ER/250 - (X - 1) * (1 month LIBOR) * (Current date - previous date)/360

where X is the leverage (e.g. 2 or 3), the current date is the current date and the previous date is the previous trading day.
Here is how the simulated 40% UPRO & 60% TMF (accounting for borrowing costs, expense ratios, daily leverage resets and quarterly rebalancing back to 40/60) would have performed over 1987-2018, as compared to the S&P 500:

Image

And here are the rolling returns:

Image

And here are the drawdowns:

Image
Image

*The funds theoretically pay a negotiated spread above LIBOR to their total return swap counterparties, but for TMF there are times when this spread is negative. Therefore I did not model this spread in the simulated data.

What is the theory behind this strategy?

There are three theoretical principles behind the strategy.

First, diversification. When one part of a well-diversified portfolio does poorly, the other parts do not necessarily drop in kind. Over the long run, long term Treasuries and the S&P 500 have had a correlation of approximately 0. (Shorter term Treasuries have been slightly more correlated with the stock market.)

Second, risk parity. Once we have decided upon the assets to hold, the next question is in what proportion we hold them. If the two assets differ significantly in volatility, you’ll want to balance them so that the more volatile asset does not drive the volatility of the portfolio as a whole. Over the long run, the average annual volatility of long term Treasuries has been 10%; unsurprisingly, the S&P 500 has been more volatile, at 15%. Therefore, a risk parity portfolio would hold more Treasuries than stocks. Simple arithmetic shows parity is achieved at 40/60.

Obviously, the problem with a 40/60 portfolio is that it delivers relatively conservative returns. The solution is leverage. So far our work has been to take risk out of the portfolio; with this last step we are putting risk back in. The upshot, though, is that our diversified, balanced portfolio delivers more return per unit of risk (i.e. has a higher Sharpe ratio) than the S&P 500 alone. So once we increase the risk of the portfolio (through leverage) to equal the risk of the S&P 500, we end up with far more return than the S&P 500. Which is exactly what the historical evidence shows.

So you are relying on Long Term Treasuries and US Stocks not crashing together. How reliable is this assumption? Can I truly depend on a negative correlation to save me?

Siamond gathered data on this question over the past 60 years:

Image

Note how few data points fall into the bottom left quadrant, and how the ones that do only show one asset with a double digit decline (and the other asset with a single digit decline).

More pertinent to this strategy is the daily relationship between the assets:

Image

(These are standard box-and-whisker charts, the box represents the middle 50% distribution, with the top and bottom of the boxes representing the 75th and 25th percentiles, respectively, and the middle line in the box representing the median)

Some observations:

1. When stocks return between -2% to +2% (normal times), LTT behave within that range as well. There is zero correlation.
2. However, when the S&P drops 2% or more in one day, there is a 75% chance that LTTs will rise. The reverse is true when the S&P rises 2% or more in a single day.
3. The negative correlation is more pronounced when stocks plunge. When the S&P drops 4% or more, LTT top 50% performance is between +1 to +3.2%. When the S&P rises 4% or more, LTT bottom 50% performance is between -0.9% and -2.4%.

All of this bodes well for the strategy.

How confident are you that your simulated backtest actually tracks the real UPRO and TMF?
UPRO tracks extremely well. TMF has some issues, but siamond's analysis indicates that since 2013 it has also "fallen in line" with the formula. I have uploaded the data here, if you would like to play with it yourself. Samsdad has provided step-by-step directions on how to run this dataset in PortfolioVisualizer: viewtopic.php?p=4578095#p4578095

I don't trust a single backtest with only one sequence of returns. Can you run a simulation instead of all possible combinations of observed returns?
Forum member pezblanco did just that. He simulated several thousand runs of 20-year periods using 1985-2018 data. Here are the distribution of returns (20-year CAGRs on the X-axis, incidence of returns on the Y-axis), with the green bars being this 3x daily leveraged balanced portfolio, and the blue bars being the S&P 500.

Image

Still not good enough for me. What about the 70s when interest rates were rising?
Here is the same simulation run from 1968-2018:

Image

Don't you know that leveraged ETFs are only intended to be held for one day?
Whenever leveraged ETFs are mentioned on this forum, people inevitably post on the dangers of "volatility decay", and how holding these funds for a longer period will guarantee that you won't get 3x performance out of them. "Decay" sounds like there is something nefarious going on with the fund, but it's nothing more than simple arithmetic of compounding returns.

Let's say over five days the daily returns of the index are +1%, -2%, +3%, -4%, +5%, and you start with $100.
At the end of the five days your $100.00 becomes $102.76.
Now let's use a 3X leveraged ETF. Ignoring ER and other costs, the daily returns are +3%, -6%, +9%, -12%, +15%.
At the end of the five days your $100.00 becomes $106.80.

$6.80 is not 3X $2.76. That's the "decay", and it's nothing more than simple math. This dynamic can also work in your favor: if you check the performance of UPRO against the S&P 500 since inception, you will see that UPRO has delivered 5x the returns of the index. If an index tends to go up over time (i.e. exhibits positive momentum), a 3x leveraged ETF will tend to perform better than 3x the index over the long term.

What are the risks of your strategy?
The main risk is that the S&P 500 and long Treasuries crash together in the same short period of time. In the past 30 years this has not happened, and I can't think of a real-world scenario in which this would happen. I acknowledge this risk and move forward having accepted it.

More potential risks have been brought up in the hundreds of posts in this thread; I assess them here.

What if the funds shut down?
If either long Treasuries or the S&P 500 were to drop -33.4% in a single day, the corresponding 3x fund would be wiped out. But realize that would be the fund working as intended. The strategy I am proposing here rests on the idea that if one asset were to drop so precipitously, the other asset would rise sharply to save the portfolio.

I suppose there is another concern that the companies managing the funds could shut down for some reason unrelated to the underlying assets. I am unconcerned about this; here are the reasons why.

Doesn't this strategy rely on a stock bull market?
No. Let's consider the period Jan 2000 - Sept 2011, the "lost decade" for US stocks when the S&P 500 crashed twice and delivered 0% total return. My strategy would have delivered 11% CAGR during this period.This is the beauty of risk parity, when one asset goes down, the other does not.

Doesn't this strategy rely on a bond bull market?
No. Let’s not forget that this strategy levers up both stocks and bonds. During rising interest rates (when bonds fall), it turns out that stocks tend to go up.

In the second simulation above which includes the 1970s, the right tail of returns still stretches into the 20 - 30% CAGR range.

Why not just 100% UPRO?
Because the drawdowns will be super deep during market crashes, and it may take decades to recover. Here is the backtest between 40/60 3xS&P/3xLTT (Portfolio 1) and 100% 3xS&P (Portfolio 2).

Image

Why not add gold / commodities / NASDAQ QQQ / small cap / international stocks?

When considering which assets to hold in 3x leveraged form, you should ask yourself two questions:

1. How volatile is the asset? Is there a high risk of it going to zero in 3x form?
2. Does adding it improve the portfolio’s overall diversification?

Commodities, small caps, emerging markets, tech stocks, are all super volatile (>20% annual volatility, vs. 15% for the S&P 500 and 10% for Long Term Treasuries), and so there is a high risk that volatility decay will cause them to collapse in a -90% drawdown over a short period of time.

Developed market stocks is the only equity asset I would consider holding in addition to the S&P 500, as it is only slightly more volatile than the S&P. However, siamond has found serious issues with the way the DZK ETF is implemented that prevent us from recommending it:

And gold. I just don’t believe we will ever see the kind of inflation again where holding a small portion of gold will actually make a difference to your portfolio. Stocks do reasonably well during moderate inflation.

Why don't you use futures? Wouldn't that be cheaper?
It is hard to control your exact leverage exposure with futures due to the large contract sizes and daily cash settlement. For example, one S&P 500 emini contract has a notional value of $140k. I’m willing to pay the extra costs of the ETFs to avoid the time required to monitor and maintain a futures position.

How much money are you committing to this? How does this account relate to your overall AA?
I'm investing $100k and letting it ride. As of today (Feb 2019) this represents 15% of my investable assets. I will exclude this account from my overall AA going forward. This is the only way for this to work and grow into the millions; otherwise I would be constantly rebalancing away from this strategy and it would never be able to compound successfully. The rest of my assets will be invested "normally".

What is your goal with this strategy?
$10M. If past is prologue, I should be able to hit this number in 25-30 years. If interest rates (and therefore borrowing costs) stay low, the CAGR should be in the mid-20s, allowing me to reach $10M within 20 years.

If this such a sure thing, why hasn’t anyone else done it?
They have.

PIMCO's StocksPLUS Long Duration Fund (PSLDX) was launched in September 2007. It holds:

100% S&P 500 futures
100% Long Bonds (actively managed, both Treasury & Corporate)
-100% 3-month LIBOR

Returns since inception have compared favorably to the S&P 500. It has a 5-star rating from Morningstar, and can be found in some 401ks.

All this cavalier talk about leverage makes me think we are at a market high. What if the market crashes from here?
Once again, this strategy is market agnostic. No matter what the market does from here, the strategy is intended to perform similarly to the S&P 500 on the downside. Samsdad ran through how "Bob, the world's worst market timer" would have done with this strategy over the past 30 years:
viewtopic.php?p=4413245#p4413245

Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Last edited by HEDGEFUNDIE on Mon Aug 12, 2019 9:55 pm, edited 115 times in total.

cheezit
Posts: 260
Joined: Sat Jul 14, 2018 7:28 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by cheezit » Tue Feb 05, 2019 3:05 pm

Here's to this becoming an excellent adventure, rather than a bogus journey :sharebeer As you noted, the risk here is the correlation between equities and long treasuries going from -0.2ish (where it's been for a while) to something positive (where it has been something like a decade ago) at the same time as an equity bear market.

elderwise
Posts: 202
Joined: Fri Jul 22, 2016 10:27 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by elderwise » Tue Feb 05, 2019 3:11 pm

I am no financial expert, but isnt the whole idea of whole idea of holding 3X or XX leveraged ETF's to hold them only short term?

From my limited understanding they go up when the market goes down? so how are you expecting to make 10M holding it LONG term?

Maybe I misunderstand, hedge funding / futures / contracts I can never get a hold of no matter how much I try to make sense by reading more about them(the only thing I understood so far about futures is that you sign a contract to get delivery of X at a certain date Y)...

User avatar
Time2Quit
Posts: 244
Joined: Thu Nov 01, 2018 9:47 am
Location: Fridgid State

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Time2Quit » Tue Feb 05, 2019 3:14 pm

Good luck and may your reward be lots of :moneybag :moneybag :moneybag

I am replying just so I can track your progress. :beer
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

Iridium
Posts: 526
Joined: Thu May 19, 2016 10:49 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Iridium » Tue Feb 05, 2019 3:35 pm

elderwise wrote:
Tue Feb 05, 2019 3:11 pm
I am no financial expert, but isnt the whole idea of whole idea of holding 3X or XX leveraged ETF's to hold them only short term?

From my limited understanding they go up when the market goes down? so how are you expecting to make 10M holding it LONG term?
There are inverse ETFs, but OP is not buying one. The problem with holding 3x leveraged ETFs long term is not that they will inevitably go down in a rising market, it is that they won't necessarily perform very close to triple the index, as an unsuspecting investor would expect. The reason is that, in order to maintain their leverage, the funds buy after the market goes up and sells after the market goes down. This can save your bacon if the market heads down consistently over several days and can lead to fantastic wealth as you 'double down' in consistently rising markets. Where it gets you though is it causes you to 'buy high, sell low' is markets that go up and down from day to day. Ultimately, OP's backtest has indicated that the benefits exceeded the cost over the period he or she tested. Some of the effect is dampened by rebalancing, but nobody should kid themselves: the strategy won't give 3 times the long term return of the index. It will be vastly better or worse depending on whether market moves have a certain level of momentum to them (i.e. it moves in the same direction from day to day more than expected from purely random).

Hedgiefundie, out of curiosity, what is your rebalancing strategy? I wish you the very best of luck over the next couple of decades.

User avatar
aj76er
Posts: 704
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by aj76er » Tue Feb 05, 2019 3:40 pm

Does your back testing factor in costs (expense ratios, bid-ask, etc)? I think you'd still be ahead, but the risk adjusted return would not look as good.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

ERguy101
Posts: 151
Joined: Sat Jul 04, 2015 11:09 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by ERguy101 » Tue Feb 05, 2019 3:41 pm

May you example what a 3x leveraged ETF is?
Last edited by ERguy101 on Tue Feb 05, 2019 3:43 pm, edited 1 time in total.

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 3:42 pm

Iridium wrote:
Tue Feb 05, 2019 3:35 pm
Hedgiefundie, out of curiosity, what is your rebalancing strategy? I wish you the very best of luck over the next couple of decades.
Rebalance to 60% TMF / 40% UPRO every quarter. This had the best results in the backtest and I had no better justification for any other timing.
Last edited by HEDGEFUNDIE on Sat Feb 16, 2019 3:47 pm, edited 1 time in total.

User avatar
ray.james
Posts: 1166
Joined: Tue Jul 19, 2011 4:08 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by ray.james » Tue Feb 05, 2019 3:51 pm

Hedgefundie,

Best wishes. I hope you beat the S&P. I have read a bunch on these strategies. The only issue is with volatility determines the success and the extent of success. It does not even matter market is up or down in 10 years.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

elderwise
Posts: 202
Joined: Fri Jul 22, 2016 10:27 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by elderwise » Tue Feb 05, 2019 3:53 pm

Interesting, so do the numbers scale down to sub 50K say would I be able to do the same as you trying with 100K aiming for 10M assuming your theory works.

so 10K would be 1M (assuming the scaling is right? )

If so maybe ill try this too :D no just kidding.

atleast this is safer than investing 10k or 100K into crypto :oops:

User avatar
hdas
Posts: 1269
Joined: Thu Jun 11, 2015 8:24 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hdas » Tue Feb 05, 2019 4:01 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm

I'm investing $100k and letting it ride. As of today this represents 15% of my investable assets. I will exclude this amount from my general AA going forward. UPRO & TMF, the two ETFs I will use, only have a history of 10 years. But it is simple to re-create how these ETFs would have performed had they existed earlier (i.e. just take the daily returns of the S&P 500 and long Treasury index and multiply by 3). Forum member EfficientInvestor was generous enough to provide me with this data set.
How do the results look with the period ending in 2008?...(I believe 2009-Now are carrying most of the profits of the strategy)

Cheers :greedy
Last edited by hdas on Thu Feb 07, 2019 5:28 pm, edited 3 times in total.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Tue Feb 05, 2019 4:11 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
What is your goal?
$10M. If past is prologue, I should be able to hit this number in 20 years when I am 53 years old, at which point I will stop "playing the game" and move into [unleveraged] Treasuries. Penalty-free Roth IRA withdrawals begin, as we all know, at 59.5.
When I've looked at this strategy (and if I were younger I'd probably be actually doing it), the strategy that made the most sense to me was to work out a "target equity exposure" for each year and then gradually deleverage in order to maintain that.

For instance, you're starting out with $120k in equity exposure (40% x 3) and let's state your goal as having $12m in equity exposure at age 53 (aka a total portfolio of $10m)

Let's say at age 40 your portfolio is worth $650,000. That's equity exposure of $780k but your equity exposure target at that age is only $600. You'd remove enough from the leveraged portfolio to reduce your equity exposure back down to your target.

A policy similar to this one is more precisely managing your risk exposure as opposed to your capital investment. A string of good/lucky years up front would mean taking some money off the table earlier so that you are maintaining a similar risk profile through time, rather than a similar capital allocation profile.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 4:15 pm

vineviz wrote:
Tue Feb 05, 2019 4:11 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
What is your goal?
$10M. If past is prologue, I should be able to hit this number in 20 years when I am 53 years old, at which point I will stop "playing the game" and move into [unleveraged] Treasuries. Penalty-free Roth IRA withdrawals begin, as we all know, at 59.5.
When I've looked at this strategy (and if I were younger I'd probably be actually doing it), the strategy that made the most sense to me was to work out a "target equity exposure" for each year and then gradually deleverage in order to maintain that.

For instance, you're starting out with $120k in equity exposure (40% x 3) and let's state your goal as having $12m in equity exposure at age 53 (aka a total portfolio of $10m)

Let's say at age 40 your portfolio is worth $650,000. That's equity exposure of $780k but your equity exposure target at that age is only $600. You'd remove enough from the leveraged portfolio to reduce your equity exposure back down to your target.

A policy similar to this one is more precisely managing your risk exposure as opposed to your capital investment. A string of good/lucky years up front would mean taking some money off the table earlier so that you are maintaining a similar risk profile through time, rather than a similar capital allocation profile.
Not a bad idea, vineviz. Something I will consider.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Tue Feb 05, 2019 4:19 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
What is the evidence supporting your strategy?
UPRO & TMF, the two ETFs I will use, only have a history of 10 years. But it is simple to re-create how these ETFs would have performed had they existed earlier (i.e. just take the daily returns of the S&P 500 and long Treasury index and multiply by 3). Forum member EfficientInvestor was generous enough to provide me with this data set.

Here is how 60% TMF & 40% UPRO, rebalanced quarterly, would have performed over 1987-2018:
Image
Also, FWIW, I think the simulated data you used is probably overstating the likely returns from a strategy like this (mostly likely by not properly accounting for the volatility drag and expenses).

My simulations, which I very carefully matched to UPRO and TMF, suggests a CAGR from 1987 to 2018 of something closer to 19% than the 23.75% your backtest produced. Doesn't seem like a big difference, but it's huge when compounded over that period of time. Growing $100k to $3,000,000 is not nothing, but its not $10,000,000.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 4:26 pm

vineviz wrote:
Tue Feb 05, 2019 4:19 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
What is the evidence supporting your strategy?
UPRO & TMF, the two ETFs I will use, only have a history of 10 years. But it is simple to re-create how these ETFs would have performed had they existed earlier (i.e. just take the daily returns of the S&P 500 and long Treasury index and multiply by 3). Forum member EfficientInvestor was generous enough to provide me with this data set.

Here is how 60% TMF & 40% UPRO, rebalanced quarterly, would have performed over 1987-2018:
Image
Also, FWIW, I think the simulated data you used is probably overstating the likely returns from a strategy like this (mostly likely by not properly accounting for the volatility drag and expenses).

My simulations, which I very carefully matched to UPRO and TMF, suggests a CAGR from 1987 to 2018 of something closer to 19% than the 23.75% your backtest produced. Doesn't seem like a big difference, but it's huge when compounded over that period of time. Growing $100k to $3,000,000 is not nothing, but its not $10,000,000.
Will PM you for the details.

User avatar
Nate79
Posts: 5177
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Nate79 » Tue Feb 05, 2019 4:41 pm

Sounds interesting and I will be following this as I'm always interested in alternative strategies for part of my portfolio.

Jags4186
Posts: 3907
Joined: Wed Jun 18, 2014 7:12 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Jags4186 » Tue Feb 05, 2019 4:49 pm

So what jumps at me whenever I see a great backtested strategy are the following:

1). What conditions occurred that allowed these great returns
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
3). What would lead this strategy to fail miserably vs following a 40/60 unleveraged strategy.

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 4:52 pm

Deleted
Last edited by HEDGEFUNDIE on Mon Feb 18, 2019 1:06 am, edited 1 time in total.

FinancialRookie
Posts: 54
Joined: Wed Nov 14, 2018 1:37 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by FinancialRookie » Tue Feb 05, 2019 4:58 pm

I find this fascinating. I'm curious, what is the downside risk? What if the worst 10% outcome happens, what would your final numbers look like? How far off would your final number be from simply investing in VFIAX?

Jags4186
Posts: 3907
Joined: Wed Jun 18, 2014 7:12 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Jags4186 » Tue Feb 05, 2019 5:53 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 4:52 pm
Jags4186 wrote:
Tue Feb 05, 2019 4:49 pm
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
This is why I provided the rolling returns view. The worst performance that this strategy has delivered over a 10-year period (out of the 21 possible 10-year periods in this timeframe) is better than the average performance of the S&P 500 over a 10-year period.
So now my question would be—what happens to UPRO in 2008/2009? UPROs inception is conveniently *after* the market bottom. If there is a 50% drop, what happens to ETF?

hohum
Posts: 26
Joined: Thu Jan 03, 2019 2:34 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hohum » Tue Feb 05, 2019 6:02 pm

Pretty sure in the 1970s stocks and bonds went down the drain together for months or years at a time.

Also, in your back testing you're starting from 1987 when long term treasuries were probably yielding 8-10%, or from more recent times like 2009-2010 when they were probably yielding at least 4-5%.

Does it matter that you're starting with a yield of 3%? It sees like TMF has a good chance to deliver negative returns over the next 20 years. Buffett has said if shorting was his game he'd probably short the long treasury here, for example. Does it even matter in a hedgie strategy like this (I don't know but seems like a potential problem)?

User avatar
kenyan
Posts: 2986
Joined: Thu Jan 13, 2011 12:16 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by kenyan » Tue Feb 05, 2019 6:08 pm

Jags4186 wrote:
Tue Feb 05, 2019 5:53 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 4:52 pm
Jags4186 wrote:
Tue Feb 05, 2019 4:49 pm
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
This is why I provided the rolling returns view. The worst performance that this strategy has delivered over a 10-year period (out of the 21 possible 10-year periods in this timeframe) is better than the average performance of the S&P 500 over a 10-year period.
So now my question would be—what happens to UPRO in 2008/2009? UPROs inception is conveniently *after* the market bottom. If there is a 50% drop, what happens to ETF?
I imagine that UPRO would've been demolished, but the 60% TMF would've saved the overall portfolio.

I would think the biggest risk would be spiking interest rates, which could kill both stocks and bonds, and the entire Roth IRA.
Retirement investing is a marathon.

User avatar
dgm
Posts: 214
Joined: Sun Mar 13, 2011 10:32 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by dgm » Tue Feb 05, 2019 6:16 pm

:sharebeer to your endeavor and a thank you for allowing us to follow along.

taking risk w/ 15% of your portfolio sounds large but manageable. i'd recommend maybe slightly less and a good plan on understanding margin calls and what your plan is for those, should the worst case happen.

anecdotally i have occasionally shorted 3x funds. overall i am positive but not by any insane margin.
1. due to the large safety margin needed to handle the volatility
2. my desire to only risk a little capital due to my feeling it is fundamentally unsound as a strategy.

honestly i would've probably gotten a better return spending that time working harder at my primary job.

pdavi21
Posts: 1239
Joined: Sat Jan 30, 2016 4:04 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by pdavi21 » Tue Feb 05, 2019 6:25 pm

I wonder if anyone has tried this (with money) with a diversified portfolio (including INTL 3x and 3x tilts).

I compared my portfolio to a 3x bull portfolio (without money). It seems no matter what, the 3x leveraged portfolio outperforms by about double (CAGR). I tried cherry picking April 2011 and Feb 2015 and messing with re-balancing to hurt the 3x portfolio, but it recovered in 18 months and still ended up returning about double (CAGR). I imagine it would've taken 5-12 years to recover if I could cherry pick the top of 2007. Most of the returns are driven by US Long 3x.

Perhaps this would have been a profitable endeavor had someone decided to undertake it in the past. Maybe it still will be profitable in the future (for someone else).

Interestingly, (Emerging) EDC still loses to VWO even when you pick the precise bottom in 2009. (Developed) DZK beats VEA from absolute bottom, but loses from Jan 2019. SPXL absolutely murders VTI (US market), and TNA kills VB (US small cap) pretty bad. TMF beats EDV, but they trade blows depending on time interval. I was too lazy to find INTL small cap, but I imagine the 3x ETF would've been horrible like EDC and DZK.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

User avatar
whodidntante
Posts: 6665
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by whodidntante » Tue Feb 05, 2019 6:35 pm

If the reaper shows up, remember to make him your friend and to include him in your act.
Image

JonFromDimensionC137
Posts: 57
Joined: Thu Dec 31, 2015 1:22 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by JonFromDimensionC137 » Tue Feb 05, 2019 6:50 pm

Interesting thread. Hope it works out for you and you stick around to tell us all about it.

One risk that I didn't see mentioned is the ability of the ETF to actually rebalance properly for negligible costs even in extreme market conditions. For example, if the market hits its circuit breakers, the fund may not be able to hedge properly for its rebalance. The fund can lose (or gain) significant amounts of money on events like this.

It is difficult to quantify, but definitely something that should be considered.
--This message sent from an NSA monitored device.

User avatar
Time2Quit
Posts: 244
Joined: Thu Nov 01, 2018 9:47 am
Location: Fridgid State

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Time2Quit » Tue Feb 05, 2019 7:08 pm

If you backtest using PV starting 2015. Performance is only slightly better that the SP500. If you don’t rebalance quarterly during this time frame the SP500 handily beats it.

The 2015-2018 was a good bull market, I was expecting phenomenal returns from this strategy during this time period. :confused
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

User avatar
unclescrooge
Posts: 3957
Joined: Thu Jun 07, 2012 7:00 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by unclescrooge » Tue Feb 05, 2019 7:11 pm

Good thing you didn't start last year.
You'd be down 17% for 2018.

dalbright
Posts: 201
Joined: Sun Oct 21, 2018 6:23 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by dalbright » Tue Feb 05, 2019 7:18 pm

Love the idea! I had thought seriously about doing this but vanguard decided to change my mind as of a few weeks ago...

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 7:22 pm

Time2Quit wrote:
Tue Feb 05, 2019 7:08 pm
If you backtest using PV starting 2015. Performance is only slightly better that the SP500. If you don’t rebalance quarterly during this time frame the SP500 handily beats it.

The 2015-2018 was a good bull market, I was expecting phenomenal returns from this strategy during this time period. :confused
unclescrooge wrote:
Tue Feb 05, 2019 7:11 pm
Good thing you didn't start last year.
You'd be down 17% for 2018.
The fact that this strategy is uncorrelated with the stock market is a feature, not a bug.
dalbright wrote:
Tue Feb 05, 2019 7:18 pm
Love the idea! I had thought seriously about doing this but vanguard decided to change my mind as of a few weeks ago...
Exactly, which is why my tracker screenshot is of M1 Finance, not Vanguard. Easiest account migration ever (especially when compared with my experience rolling over past accounts to Vanguard).

User avatar
unclescrooge
Posts: 3957
Joined: Thu Jun 07, 2012 7:00 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by unclescrooge » Tue Feb 05, 2019 7:26 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 7:22 pm
Time2Quit wrote:
Tue Feb 05, 2019 7:08 pm
If you backtest using PV starting 2015. Performance is only slightly better that the SP500. If you don’t rebalance quarterly during this time frame the SP500 handily beats it.

The 2015-2018 was a good bull market, I was expecting phenomenal returns from this strategy during this time period. :confused
unclescrooge wrote:
Tue Feb 05, 2019 7:11 pm
Good thing you didn't start last year.
You'd be down 17% for 2018.
The fact that this strategy is uncorrelated with the stock market is a feature, not a bug.
dalbright wrote:
Tue Feb 05, 2019 7:18 pm
Love the idea! I had thought seriously about doing this but vanguard decided to change my mind as of a few weeks ago...
Exactly, which is why my tracker screenshot is of M1 Finance, not Vanguard. Easiest account migration ever (especially when compared with my experience rolling over past accounts to Vanguard).
But it isn't uncorrelated. Unless I'm not understanding your strategy.

I'm super skeptical this will perform to the level you believe it will. I've looked at this strategy 2 years ago and I wasn't convinced it would work.

jaj2276
Posts: 472
Joined: Sat Apr 16, 2011 5:13 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by jaj2276 » Tue Feb 05, 2019 7:50 pm

I'm quite the risk averse investor but it's ideas like this that pique my interest for a small portion of my portfolio. I'd hate to lose $100k of Roth space that I won't be able to get back. Definitely going to look in to this some more to try and understand the actual machinations of the strategy. Posting here so I can easily find the thread again.

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 7:51 pm

Deleted
Last edited by HEDGEFUNDIE on Mon Feb 18, 2019 1:03 am, edited 1 time in total.

User avatar
pokebowl
Posts: 317
Joined: Sat Dec 17, 2016 7:22 pm
Location: The Orion Spur of the Milky Way galaxy.

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by pokebowl » Tue Feb 05, 2019 7:59 pm

Interesting discussion here. I've seen this strategy discussed before, or variations of it discussed but never bothered to put my money up for it, so I will be watching this thread with interest. On a cynical note, MarketTimer also started his sure fire get rich margin strategy at peak market at the tail end of 2007, and here we are with a similar thread... Is this the current market peak? Should I start "shorting" this strategy? :twisted:
Nullius in verba.

User avatar
Ben Mathew
Posts: 787
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle
Contact:

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Ben Mathew » Tue Feb 05, 2019 8:25 pm

Interesting experiment. I hope it works out for you. A couple questions:

1. The leveraged lifecycle investment strategy described by Ayres and Nalebuff is a method to reduce lifetime portfolio risk by taking risk out of the middle years when the portfolio is overweight and spreading it into the early years when it is underweight. Do you view your strategy also as a way to reduce risk--i.e. are taking on more risk now so you can reduce risk closer to retirement? On the one hand, your plan to switch to 100% bonds if you hit your number at around age 53 seems consistent with the lifecycle strategy. But, on the other hand, the sudden drop from an aggressively leveraged position to 100% bonds seems too sharp a break to be optimal. Are there other considerations at play? And what will your AA be if you don't hit your number? Will you still reduce risk in your 50s? The lifecycle strategy would reduce AA even if the early years did not go well. It does not condition on success.

2. Why take on (presumably expensive) leverage with 15% of your portfolio instead of just going to 100% stocks on your entire portfolio? Is the remaining 85% of the portfolio already at 100% stocks, and you're looking to push past 100% stocks?

Beliavsky
Posts: 932
Joined: Sun Jun 29, 2014 10:21 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Beliavsky » Tue Feb 05, 2019 9:02 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm
What is the evidence supporting your strategy?
UPRO & TMF, the two ETFs I will use, only have a history of 10 years. But it is simple to re-create how these ETFs would have performed had they existed earlier (i.e. just take the daily returns of the S&P 500 and long Treasury index and multiply by 3).
If you have 300% exposure you need to account for the cost of borrowing 200% of your capital. I suggest backtesting with S&P 500 futures or Treasury bond or note futures.

columbia
Posts: 1979
Joined: Tue Aug 27, 2013 5:30 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by columbia » Tue Feb 05, 2019 9:42 pm

Skepticism seems to be rooted in opinions on why it shouldn’t work; for fun, I’d like to see metrics of why it won’t work.

I’m don’t have the stomach for this approach, but would probably go with a vanilla version of 20% UPRO and 80% intermediate treasuries.

User avatar
unclescrooge
Posts: 3957
Joined: Thu Jun 07, 2012 7:00 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by unclescrooge » Tue Feb 05, 2019 10:03 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 7:51 pm
unclescrooge wrote:
Tue Feb 05, 2019 7:26 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 7:22 pm
Time2Quit wrote:
Tue Feb 05, 2019 7:08 pm
If you backtest using PV starting 2015. Performance is only slightly better that the SP500. If you don’t rebalance quarterly during this time frame the SP500 handily beats it.

The 2015-2018 was a good bull market, I was expecting phenomenal returns from this strategy during this time period. :confused
unclescrooge wrote:
Tue Feb 05, 2019 7:11 pm
Good thing you didn't start last year.
You'd be down 17% for 2018.
The fact that this strategy is uncorrelated with the stock market is a feature, not a bug.
dalbright wrote:
Tue Feb 05, 2019 7:18 pm
Love the idea! I had thought seriously about doing this but vanguard decided to change my mind as of a few weeks ago...
Exactly, which is why my tracker screenshot is of M1 Finance, not Vanguard. Easiest account migration ever (especially when compared with my experience rolling over past accounts to Vanguard).
But it isn't uncorrelated. Unless I'm not understanding your strategy.

I'm super skeptical this will perform to the level you believe it will. I've looked at this strategy 2 years ago and I wasn't convinced it would work.
The first backtest image I posted above shows the strategy is 0.57 correlated with TSM over the past 31 years.

If you had invested in this strategy in 01/2017 (i.e. two years ago), you would be up 11.3% by 12/2018, compared to the S&P 500's 7.8% .
I didn't have 31 years of data at my disposal so I used just several years.

Ironically, my portfolio was also up 11.32% during the same time frame. It's a global, slice and dice portfolio with 20% bonds. :mrgreen:

HAL 9000
Posts: 93
Joined: Thu Apr 13, 2017 10:23 pm
Location: USA

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HAL 9000 » Tue Feb 05, 2019 10:10 pm

Strange things are afoot at the circle k....indeed!

rick2427
Posts: 114
Joined: Sun Jan 25, 2015 11:29 pm
Location: Missouri

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by rick2427 » Tue Feb 05, 2019 10:13 pm

Curious if this strategy will work or self destruct?
Only time will tell.

caklim00
Posts: 1936
Joined: Mon May 26, 2008 10:09 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by caklim00 » Tue Feb 05, 2019 10:22 pm

HAL 9000 wrote:
Tue Feb 05, 2019 10:10 pm
Strange things are afoot at the circle k....indeed!
What number are we thinking of?

Bfwolf
Posts: 1962
Joined: Thu Oct 14, 2010 11:19 am

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Bfwolf » Tue Feb 05, 2019 10:23 pm

I will go on record as saying I hope this DOESN'T work, as Hedgefundie can afford to lose 15% of his portfolio, but the dozens of copycats that would follow won't. This strategy may work for a limited period of time. But it will fail at some point.

User avatar
Time2Quit
Posts: 244
Joined: Thu Nov 01, 2018 9:47 am
Location: Fridgid State

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by Time2Quit » Tue Feb 05, 2019 10:28 pm

I am not doubting or being negative, I am just want to know what conditions would need to be present for this strategy outperform the market?

We know in the last 4 years it tied the market, but over the longer run it killed the market.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

EfficientInvestor
Posts: 237
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by EfficientInvestor » Tue Feb 05, 2019 10:40 pm

HEDGEFUNDIE - Thanks for starting the thread. As you know, I am also utilizing a 3X ETF portfolio. While I’m a believer in your backtest, because I have run the numbers myself, I’m sure others are skeptical regarding the use of leveraged ETFs. This is especially the case because 3X ETFs weren’t around during the recession (and beyond). However, a few 2X funds were around prior to the recession. Therefore, I have provided the backtest below that shows a 2x 40/60 portfolio using S&P 500 and 7-10 year treasuries (P1). I have compared it to a 60/40 portfolio of comparable non-leveraged funds (P2), a 40/60 portfolio of the same (P3), and a 100/0 portfolio. Here are the results:

Jul 2006 - Jan 2019
P1 (2x 40/60) - CAGR = 11.8%, Max DD = -21.7%
P2 (60/40) - CAGR = 7.7%, Max DD = -27.8%
P3 (40/60) - CAGR = 7.0%, Max DD = -13.9%
S&P 500 - CAGR = 8.3%, Max DD = -51.0%

https://www.portfoliovisualizer.com/bac ... tion4_3=60

Here are some thoughts:

- The 2x portfolio had much higher annualized returns than the S&P 500 over the time period with less drawdown than the 60/40 portfolio.
- The reason leveraged indexing works is because you are applying leverage to an AA that is drastically more efficient than a stock heavy portfolio.
- If you look at the metrics tab of the backtest, notice the difference in the arithmetic mean of P1 vs P3. Theoretically, P1 should be 2 times P3 minus expense ratio (~1%) minus intra-year volitility drag. In this case, the avg of P3 was 7.15% and P1 was 12.6%. 7.15x2 - 12.6 = 1.7. Therefore, if expense ratio accounts for 1%, intra-year volatility decay accounted for 0.7%. Not bad considering the volatility that occurred over the time period.

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 10:44 pm

Deleted
Last edited by HEDGEFUNDIE on Sat Feb 16, 2019 3:49 pm, edited 2 times in total.

itsmeagain
Posts: 24
Joined: Sat Jan 09, 2016 7:24 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by itsmeagain » Tue Feb 05, 2019 10:54 pm

Count me skeptical of a strategy that leverages long duration treasuries, given the current low rates and very flat yield curve from short to long duration. That said, at least the OP is restricting this experiment to only 15% of their portfolio.

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 11:10 pm

Ben Mathew wrote:
Tue Feb 05, 2019 8:25 pm
Interesting experiment. I hope it works out for you. A couple questions:

1. The leveraged lifecycle investment strategy described by Ayres and Nalebuff is a method to reduce lifetime portfolio risk by taking risk out of the middle years when the portfolio is overweight and spreading it into the early years when it is underweight. Do you view your strategy also as a way to reduce risk--i.e. are taking on more risk now so you can reduce risk closer to retirement? On the one hand, your plan to switch to 100% bonds if you hit your number at around age 53 seems consistent with the lifecycle strategy. But, on the other hand, the sudden drop from an aggressively leveraged position to 100% bonds seems too sharp a break to be optimal. Are there other considerations at play? And what will your AA be if you don't hit your number? Will you still reduce risk in your 50s? The lifecycle strategy would reduce AA even if the early years did not go well. It does not condition on success.

2. Why take on (presumably expensive) leverage with 15% of your portfolio instead of just going to 100% stocks on your entire portfolio? Is the remaining 85% of the portfolio already at 100% stocks, and you're looking to push past 100% stocks?
I am mentally segregating this account from the rest of my assets. This is the only way I can reach my goal of $10M. If the strategy does work, this one account will overwhelm everything else I own, and the pressure to rebalance, take money off the table, will be tremendous. No matter how large this account gets, I will consider it my lottery ticket, and persevere in not touching it until I reach my goal of $10M.

The rest of my assets will be invested according to the traditional glide path, currently I hold 80/20, by mid-50s I'll probably be closer to 60/40. At my current level of savings, I'll probably reach $4-5M by mid-50s anyway, through the traditional path. This account is entirely entertainment, a chance to prove out the theories of diversification (using ultra long Treasuries) that I have advocated for around here, and a chance to leave a nice legacy for my kids.
Last edited by HEDGEFUNDIE on Tue Feb 05, 2019 11:16 pm, edited 2 times in total.

User avatar
HomerJ
Posts: 13400
Joined: Fri Jun 06, 2008 12:50 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HomerJ » Tue Feb 05, 2019 11:15 pm

Jags4186 wrote:
Tue Feb 05, 2019 4:49 pm
So what jumps at me whenever I see a great backtested strategy are the following:

1). What conditions occurred that allowed these great returns
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
3). What would lead this strategy to fail miserably vs following a 40/60 unleveraged strategy.
Backtest for 1987-2018.

Long Treasuries did AMAZING through most of that period, as interest rates dropped

Today's conditions for Long Treasuries are not the same.
The J stands for Jay

Topic Author
HEDGEFUNDIE
Posts: 3638
Joined: Sun Oct 22, 2017 2:06 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Tue Feb 05, 2019 11:36 pm

HomerJ wrote:
Tue Feb 05, 2019 11:15 pm
Jags4186 wrote:
Tue Feb 05, 2019 4:49 pm
So what jumps at me whenever I see a great backtested strategy are the following:

1). What conditions occurred that allowed these great returns
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
3). What would lead this strategy to fail miserably vs following a 40/60 unleveraged strategy.
Backtest for 1987-2018.

Long Treasuries did AMAZING through most of that period, as interest rates dropped

Today's conditions for Long Treasuries are not the same.
I have said this before, I'll say it again. The reason the Long Treasuries are there is NOT because of their expected return. It's because of their status as the ultimate global flight-to-safety asset, the asset that reliably surges when stocks crash. This dynamic, along with regular rebalancing, is the key to the strategy, and why it has held up over the past 30 years.

User avatar
HomerJ
Posts: 13400
Joined: Fri Jun 06, 2008 12:50 pm

Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HomerJ » Tue Feb 05, 2019 11:41 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 11:36 pm
HomerJ wrote:
Tue Feb 05, 2019 11:15 pm
Jags4186 wrote:
Tue Feb 05, 2019 4:49 pm
So what jumps at me whenever I see a great backtested strategy are the following:

1). What conditions occurred that allowed these great returns
2). Where are we today and how does it compare to the starting point at the beginning of the back test?
3). What would lead this strategy to fail miserably vs following a 40/60 unleveraged strategy.
Backtest for 1987-2018.

Long Treasuries did AMAZING through most of that period, as interest rates dropped

Today's conditions for Long Treasuries are not the same.
I have said this before, I'll say it again. The reason the Long Treasuries are there is NOT because of their expected return. It's because of their status as the ultimate global flight-to-safety asset, the asset that reliably surges when stocks crash. This dynamic, along with regular rebalancing, is the key to the strategy, and why it has held up over the past 30 years.
Your return numbers from the backtest are high because of how well Long Treasuries did during that period. You will not get those same numbers starting from this point.

The plan may indeed do very well, but you are highly unlikely to get your $10 million in the same amount of time, because you are NOT starting with 10% Treasuries with falling interest rates.
The J stands for Jay

Locked