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

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

Post by AlphaLess » Fri Feb 22, 2019 11:38 pm

For what it's worth, since this leverage strategy depends on the spread of long bond vs short rate, here are two charts from FRED.
Conveniently, they cover the period from mid-1970s to present:

https://fred.stlouisfed.org/series/T10Y2Y : hit on MAX.

https://fred.stlouisfed.org/graph/?g=10SJ : same.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Fri Feb 22, 2019 11:44 pm

AlphaLess wrote:
Fri Feb 22, 2019 11:38 pm
For what it's worth, since this leverage strategy depends on the spread of long bond vs short rate, here are two charts from FRED.
Conveniently, they cover the period from mid-1970s to present:

https://fred.stlouisfed.org/series/T10Y2Y : hit on MAX.

https://fred.stlouisfed.org/graph/?g=10SJ : same.
Looks to me like the term premium is ripe for a rebound! :P

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

Post by mrspock » Sat Feb 23, 2019 12:00 am

AlphaLess wrote:
Fri Feb 22, 2019 11:32 pm
mrspock wrote:
Fri Feb 22, 2019 11:16 pm
AlphaLess wrote:
Fri Feb 22, 2019 11:05 pm
That's 4.95 * 2 * 4 = 40 a year.
If you are running this with a $10K portfolio, thats 40 bps (aka 0.4%) per year. OUCH.
Costs keep piling.
A fair point, but annual rebalancing appears to work fairly well as well, and I have quite a good bit more than $10k on this, so the drag isn’t so bad. Plus that’s a static cost which will drop over time as it hopefully blooms into a giant pile of money :D .
Cavalier attitude is never a friend of systematic investing:

- 100 bps in expense ratios,
- trading costs for the fund to rebalance (daily),
- 40 bps in trading cost by investor,
- cost of financing of leverage at above LIBOR levels,
- etc
Completely agree, but neither is it a friend to dump 20% of my portfolio into this to get a minuscule trading cost down to 1 basis point. I cannot move this to M1 (yet) as that isn’t allows by my company plan, so I’m not left with many options other than to perhaps beg/encourage fidelity to throw a few free trades my way... or not do this altogether.

When I retire or change jobs, I’ll gladly move this to M1 to get rid of the trading fee.

700 posts later... can we go back to the days where we debate how foolish owning PrimeCap funds are? (As the PrimeCap folks run out of places to bury their money....)
Last edited by mrspock on Sat Feb 23, 2019 1:25 am, edited 1 time in total.

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

Post by HEDGEFUNDIE » Sat Feb 23, 2019 12:24 am

AlphaLess wrote:
Fri Feb 22, 2019 11:32 pm
- cost of financing of leverage at above LIBOR levels
I am surprised this has not come up yet. Here is what UPRO pays for its leverage:

Image

The weighted average rate is 2.46%. 1 month LIBOR on that day was 2.00%, so the spread is 0.46%.

TMF data coming up.

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

Post by HEDGEFUNDIE » Sat Feb 23, 2019 12:39 am

Here are TMF's financing costs.

Image

Weighted average rate is 1.83%, compared to 1 month LIBOR of 2.31% on that day, yielding a negative spread.

I take back everything bad I said about TMF...

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

Post by samsdad » Sat Feb 23, 2019 1:22 am

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 12:39 am
Here are TMF's financing costs.

Image

Weighted average rate is 1.83%, compared to 1 month LIBOR of 2.31% on that day, yielding a negative spread.

I take back everything bad I said about TMF...
Nice work.

I wonder if this is the cause of the wiggling that siamond had posted seeing about TMF and the telltale chart in the other thread about working on simulating the LETF returns: viewtopic.php?t=272640
siamond wrote:
Wed Feb 13, 2019 11:24 pm
Back to bond funds, with the strange case of Direxion LETFs.

This test is based on TMF (Direxion Daily 20+ Year Treasury Bull, 3x). Here are the charts. Please note that the index being used is directly comparable to UBT (although TMF's leverage is 3x while UBT is 2x). As you can see, there are several issues. Not only does the real-life fund badly undershoots the model (by nearly 2% a year), but the Telltale chart shows a bunch of tremors that we didn't see in any of the previous charts. As was previously mentioned, a daily examination of TMF returns does NOT show the close leverage multiplier compared to its index that we see with the other funds.

This being said, since 2013, the Telltale chart stayed roughly flat on average, which means that TMF apparently did its job, albeit in a strange manner. I don't know though, using such leverage funds already requires quite the leap of faith, and this chart just doesn't inspire a lot of trust. Or maybe I am missing something...

Image

I assembled a similar chart for TYD (Direxion Daily 7-10 Year Treasury Bull, 3x) and I spare you the details, the outcome is rather strange too.

EDIT: made the vertical axis logarithmic and added the black line (regular index of reference).
During the times that the fund is outperforming the underlying index in the telltale chart, the fund was enjoying a negative spread, and then returning to earth so to speak when it wasn’t?

But wouldn’t that apply to UPRO too? Wait, is UPRO tied to LIBOR like TMF?

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

Post by HEDGEFUNDIE » Sat Feb 23, 2019 1:33 am

samsdad wrote:
Sat Feb 23, 2019 1:22 am
But wouldn’t that apply to UPRO too? Wait, is UPRO tied to LIBOR like TMF?
UPRO is tied to LIBOR. But the spread is positive.

I suspect there is something special about LTT, such that the counterparties of TMF really need to offload their LTT exposure and are willing to offer a below-market borrowing rate to do so. Speculating further, back in 2018 when these swap contracts were set up, interest rates were forecast to rise, hurting the projected returns of LTT. So it might have made sense for the counterparty to swap those LTT returns at below market prices.

If true, this suggests that during periods of rising interest rates, the silver lining for TMF is that its borrowing costs can drop meaningfully. The fund's returns might drop, but it's at least somewhat countered by these lower borrowing costs.
Last edited by HEDGEFUNDIE on Sat Feb 23, 2019 1:55 am, edited 2 times in total.

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

Post by samsdad » Sat Feb 23, 2019 1:41 am

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 1:33 am
samsdad wrote:
Sat Feb 23, 2019 1:22 am
But wouldn’t that apply to UPRO too? Wait, is UPRO tied to LIBOR like TMF?
UPRO is tied to LIBOR. But the spread is positive.

I suspect there is something special about LTT, such that the counterparties of TMF really need to offload their LTT exposure and are willing to accept [pay] a negative spread to do so. Maybe it has something to do with the inverted yield curve?
Yes you’re right. Per page IV of the annual report (and as noted in that other thread elsewhere):
• Financing Rates Associated with Derivatives: The performance of each Fund was impacted by the related financing costs. Financial instru- ments such as futures contracts carry implied financing costs. Swap financing rates are negotiated between the Funds and their coun- terparties, and are typically set at the one-week/one-month London Interbank Offered Rate (“LIBOR”) plus or minus a negotiated spread. The one-week LIBOR appreciated from 0.95% to 1.75% during the fiscal year. The one-month LIBOR also increased during the fiscal year from 1.06% to 2.00%. Each Fund with long exposure via deriv- atives was generally negatively affected by financing rates. Con- versely, most Funds with short/inverse derivative exposure generally benefited from financing rates. However, in low interest rate environments, LIBOR adjusted by the spread may actually re- sult in a Fund with short/inverse exposure also being negatively af- fected by financing rates.

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

Post by Kevin M » Sat Feb 23, 2019 1:13 pm

EfficientInvestor wrote:
Fri Feb 22, 2019 7:41 pm
Kevin M wrote:
Fri Feb 22, 2019 7:01 pm
EfficientInvestor wrote:
Fri Feb 22, 2019 4:35 pm
Unfortunately, I don't have good daily data going back that far for DM or 10-year treasuries. I hope to at least figure something out for the 10-year treasuries. Still working with siamond on trying to figure that out.
Not sure what you mean by "daily data", but daily 10-year constant-maturity Treasury (CMT) yields back to 1962 are available at FRED.

Another source of daily Treasury yields back as far as 1961 (but not that far back for 10-year) is https://www.federalreserve.gov/econresd ... 200628.xls (spreadsheet) or https://www.federalreserve.gov/econresd ... 628_1.html (screen reader version, broken up into multiple web pages--increment digit in the html page name for each successive page). Nice thing about this source is that it has maturities at finer resolution than the CMT data, for example 9-year, so can calculate returns without requiring interpolation to get the other years (e.g, if you want to simulate rolling 10-year Treasuries annually).

Kevin
Thanks. I was referring to daily data of an actual bond fund. I have the daily yield data already from the source you mention. I just haven't spent enough time yet to figure out how to manually calculate what the bond fund return would have been. If you have any resources that plainly state how to do these calculations, I would appreciate any suggestions.
You're not going to find bond fund data going back very far, so you must use simulated returns from yields to go back further than the first relevant bond fund inception date. Plus, the older bond funds are actively managed, so they probably aren't very good to use for this modeling purpose.

One approach is to use par yields (which is what the CMT yields are, and they are available in the feds200528 data), calculating the income component from the yield on the n-year bond (say n = 10) and the price return component using PRICE or PV function on the yield of the n-h year bond, where h is the holding period, say 1 year) with the yield of the n-year bond as the coupon rate. For par yield, coupon rate of the n-year bond = yield of the n-year bond, and price of n-year bond = 100.

Another approach is to use the zero coupon yields available from the second source, so you just need to calculate the price return component.

You might also look at forum member longinvest's work on simulating bond fund returns from yields, with self-correction incorporated. This is the method used to get proxy returns for various bond funds included in the Simba/siamond backtest spreadsheet, but I believe it has been implemented for annual returns only. I haven't read the related methodology thread--maybe this was brought up there? We can move this discussion to that thread if you prefer.

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

Post by MotoTrojan » Sat Feb 23, 2019 3:28 pm

HEDGEFUNDIE wrote:
Fri Feb 22, 2019 4:04 pm
MotoTrojan wrote:
Fri Feb 22, 2019 3:55 pm
Hedgefundie, could you please point me in the direction of how you setup your latest backtest in PV so I can poke around?
Here is what I did:

1. Downloaded the historical daily prices for VFINX and VUSTX from Yahoo Finance, going back to May 1986.

2. Downloaded the LIBOR 1 month rate daily prices from the STL Fed website.

3. Matched up the dates between #1 and #2 datasets (LIBOR trades in European markets on days when US markets are not open)

4. Applied EfficientInvestor’s formula on the previous page to yield the 3x daily synthetic price for each asset.

Here is the final result:

https://drive.google.com/open?id=1Byo8z ... 4tBWMebsAB
Finally popped these open, was assuming you'd have the calcs shown. Could you confirm what spread these values include (if any) on top of ER/libor? May put together my own set for learning's sake.

EDIT: Nevermind I see on page 1 you excluded this input due to TMF being negative occasionally. Hmm.

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

Post by AlphaLess » Sat Feb 23, 2019 3:54 pm

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 12:39 am
Here are TMF's financing costs.

Image

Weighted average rate is 1.83%, compared to 1 month LIBOR of 2.31% on that day, yielding a negative spread.

I take back everything bad I said about TMF...
It's nice to bring one data point. But what you are worried about is the average cost of financing: day after day.

What if 2008 style recession hits, when at times LIBOR, or even OIS, was 4-5% above Fed Funds rate?
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by mffl » Sat Feb 23, 2019 3:54 pm

mrspock wrote:
Fri Feb 22, 2019 10:41 pm
finite_difference wrote:
Fri Feb 22, 2019 7:07 pm
What I find ironic is that if you otherwise ask around here, Bogleheads expect future long-term stock returns to be like 4% real.
Long-term as in 10 years or 20? 10 perhaps, but over 20 I would find it rather unlikely. Remember, Bogleheads skew as a group, very conservative with money, investing and of course their S&P return estimates. The actual numbers are likely to skew higher because of this.

Some of us are a bit more aggressive by Boglehead standards (1-5% on a speculative investment which has been debated to *death*... twice), but on balance still laughably conservative when compared to your average investor or person (Can I retire on *just* $3M? Or have more in bonds in an “aggressive” 75/25 AA than most have in their *entire* retirement portfolio...).

There is irrationality in many forms on this board, and none of us are immune to it (a little never hurt anyone...). Even those who have perfect textbook 3 fund portfolios might take risks elsewhere... maybe they buy a fancy car or something where folks doing this might scoff at such a pointless splurge.

Constructive scrutiny is welcome, but let’s all try to relax! People doing this are going to be just fine no matter what happens, nobody is going broke here.

Now if you’ll excuse me, I need to get back to picking out colors for my Yacht.... :D
Good points. I think the skepticism is healthy, but this whole thing is relatively harmless until someone suggests it for anything other than part of your 5% "play money" portion of your portfolio. I think a bunch of Bogleheads have individual stocks and other things that we'd generally consider patently stupid under normal circumstances as part of the "play money" portion of our portfolios.

What's intriguing about this for me is that for those of us who want to be aggressive, there's 100% stocks, and then there's ~125% stocks (i.e. 100% stocks plus intentionally not paying off your mortgage early). This is obviously a contentious subject here, but certainly not far outside the mainstream.

But is there an effective way to do 126% stocks? 150%? Or is 100% + mortgage the highest level of leverage that one can achieve with enough cost effectiveness to be worth it? Since brokerage interest is so expensive for us regular humans, if such a possibility existed, it seems like it would look like this strategy. But perhaps the mortgage leverage is as far as you can reasonably go. I'm in for 0.5% of my investable assets for funsies.

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

Post by AlphaLess » Sat Feb 23, 2019 3:55 pm

mrspock wrote:
Sat Feb 23, 2019 12:00 am
AlphaLess wrote:
Fri Feb 22, 2019 11:32 pm
mrspock wrote:
Fri Feb 22, 2019 11:16 pm
AlphaLess wrote:
Fri Feb 22, 2019 11:05 pm
That's 4.95 * 2 * 4 = 40 a year.
If you are running this with a $10K portfolio, thats 40 bps (aka 0.4%) per year. OUCH.
Costs keep piling.
A fair point, but annual rebalancing appears to work fairly well as well, and I have quite a good bit more than $10k on this, so the drag isn’t so bad. Plus that’s a static cost which will drop over time as it hopefully blooms into a giant pile of money :D .
Cavalier attitude is never a friend of systematic investing:

- 100 bps in expense ratios,
- trading costs for the fund to rebalance (daily),
- 40 bps in trading cost by investor,
- cost of financing of leverage at above LIBOR levels,
- etc
Completely agree, but neither is it a friend to dump 20% of my portfolio into this to get a minuscule trading cost down to 1 basis point. I cannot move this to M1 (yet) as that isn’t allows by my company plan, so I’m not left with many options other than to perhaps beg/encourage fidelity to throw a few free trades my way... or not do this altogether.

When I retire or change jobs, I’ll gladly move this to M1 to get rid of the trading fee.

700 posts later... can we go back to the days where we debate how foolish owning PrimeCap funds are? (As the PrimeCap folks run out of places to bury their money....)
Well, there are other solutions.

For example, if you are going to keep your leveraged portfolio to an at least $30K or so, you can open a Merrill Edge account, and get those commissions waived, for example.

Trading game is won one penny at a time.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Sat Feb 23, 2019 4:06 pm

AlphaLess wrote:
Sat Feb 23, 2019 3:54 pm
HEDGEFUNDIE wrote:
Sat Feb 23, 2019 12:39 am
Here are TMF's financing costs.

Image

Weighted average rate is 1.83%, compared to 1 month LIBOR of 2.31% on that day, yielding a negative spread.

I take back everything bad I said about TMF...
It's nice to bring one data point. But what you are worried about is the average cost of financing: day after day.

What if 2008 style recession hits, when at times LIBOR, or even OIS, was 4-5% above Fed Funds rate?
If a recession hits the yield curve will invert sharply and financing a Total Return Swap for LTT will be almost free.

See my note above about why this "one data point" shows a negative spread.

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

Post by Kevin M » Sat Feb 23, 2019 4:25 pm

Don't know if it's already been mentioned, but this thread reminds me of this other thread, started in 2014: Should I use margin to buy a balanced fund?.Tthat one generated much discussion as well--19 pages.

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

Post by HEDGEFUNDIE » Sat Feb 23, 2019 4:33 pm

Here is a simplified income statement for the interest, fees, and expenses of TMF, taken from the latest annual report:

Dividends received on $72M in TLT ETF holdings: $1,594k
Interest income on cash and money market: $620k
Securities lending income (i.e. lending out TLT): $9k
1.83% financing cost on $240M of notional exposure: -$4,392k
Management expenses & fees (i.e. the ER): -$947k

Altogether the net fees are -$3,116k. On an asset base of $100M at the end of the year, that's 3.1%.

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

Post by mrspock » Sat Feb 23, 2019 8:22 pm

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 4:33 pm
Here is a simplified income statement for the interest, fees, and expenses of TMF, taken from the latest annual report:

Dividends received on $72M in TLT ETF holdings: $1,594k
Interest income on cash and money market: $620k
Securities lending income (i.e. lending out TLT): $9k
1.83% financing cost on $240M of notional exposure: -$4,392k
Management expenses & fees (i.e. the ER): -$947k

Altogether the net fees are -$3,116k. On an asset base of $100M at the end of the year, that's 3.1%.
I don’t think I could get the same 3x leverage for less than 3.1% .... doesn’t seem unreasonable from that POV.

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

Post by AlphaLess » Sat Feb 23, 2019 11:52 pm

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 4:06 pm
If a recession hits the yield curve will invert sharply and financing a Total Return Swap for LTT will be almost free.

See my note above about why this "one data point" shows a negative spread.
Forgive me about nitpicking, but in case of an inverted yield curve, borrowing at short rate, and using the proceeds to buy the long end of the curve would result in losses.

So I am not sure why you think financing a Total Return Swap for LTT will be almost free.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Sat Feb 23, 2019 11:56 pm

AlphaLess wrote:
Sat Feb 23, 2019 11:52 pm
HEDGEFUNDIE wrote:
Sat Feb 23, 2019 4:06 pm
If a recession hits the yield curve will invert sharply and financing a Total Return Swap for LTT will be almost free.

See my note above about why this "one data point" shows a negative spread.
Forgive me about nitpicking, but in case of an inverted yield curve, borrowing at short rate, and using the proceeds to buy the long end of the curve would result in losses.

So I am not sure why you think financing a Total Return Swap for LTT will be almost free.
The total return of the underlying long Treasury will certainly be negative, and you would suffer losses on that leg of the swap.

But when I say "free" I'm only talking about the financing cost of the swap: LIBOR + spread. The spread would almost certainly be negative (just as it is now), as the counterparty would be super eager to offload the LTT's losses to TMF.
Last edited by HEDGEFUNDIE on Sun Feb 24, 2019 12:27 am, edited 1 time in total.

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

Post by siamond » Sun Feb 24, 2019 12:19 am

Kevin M wrote:
Sat Feb 23, 2019 1:13 pm
You might also look at forum member longinvest's work on simulating bond fund returns from yields, with self-correction incorporated. This is the method used to get proxy returns for various bond funds included in the Simba/siamond backtest spreadsheet, but I believe it has been implemented for annual returns only. I haven't read the related methodology thread--maybe this was brought up there?
Yes, this was raised quite a few posts ago, and AlohaJoe was kind enough to provide monthly 'proxy' returns for long-term bonds in this post. This input wasn't used yet in leveraged simulations, I believe, but I plan to do it. Now as to moving to daily returns, this would be something new. Maybe we could ask AlohaJoe if it could be a reasonable project to explore.

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

Post by hilink73 » Sun Feb 24, 2019 9:29 am

Hi

What about combining Hedgefundies leveraged strategy with Willthrills trend following?

I guess the sell signals could take the edge off the huge drawdowns while still maintaining a better performance than the underlying S&P 500.

I've tried to put that in PV (https://www.portfoliovisualizer.com/tes ... odWeight=0), but I'm not seeing my expected result.
Given, you cannot use the unemployment rate as second trigger, so it's just a simple trend following strategy.
Maybe I should ramp up my LibreOffice spreadsheet...


Any thoughts?


Cheers
Hilink

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 9:48 am

hilink73 wrote:
Sun Feb 24, 2019 9:29 am
Hi

What about combining Hedgefundies leveraged strategy with Willthrills trend following?

I guess the sell signals could take the edge off the huge drawdowns while still maintaining a better performance than the underlying S&P 500.

I've tried to put that in PV (https://www.portfoliovisualizer.com/tes ... odWeight=0), but I'm not seeing my expected result.
Given, you cannot use the unemployment rate as second trigger, so it's just a simple trend following strategy.
Maybe I should ramp up my LibreOffice spreadsheet...


Any thoughts?


Cheers
Hilink
Just tried it with my simulated UPRO data going back to 1987. Timing delivered 12.9% CAGR, worse than my strategy’s 16.7%. Timing also had worse volatility and higher drawdowns.

It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.

Also, a big part of my strategy is simplicity. Check in once per quarter and press one button to rebalance, no matter how the markets are doing. In this way my strategy is 100% Boglehead-approved. Can’t say the same about market timing.

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

Post by AlphaLess » Sun Feb 24, 2019 10:18 am

HEDGEFUNDIE wrote:
Sat Feb 23, 2019 11:56 pm
AlphaLess wrote:
Sat Feb 23, 2019 11:52 pm
HEDGEFUNDIE wrote:
Sat Feb 23, 2019 4:06 pm
If a recession hits the yield curve will invert sharply and financing a Total Return Swap for LTT will be almost free.

See my note above about why this "one data point" shows a negative spread.
Forgive me about nitpicking, but in case of an inverted yield curve, borrowing at short rate, and using the proceeds to buy the long end of the curve would result in losses.

So I am not sure why you think financing a Total Return Swap for LTT will be almost free.
The total return of the underlying long Treasury will certainly be negative, and you would suffer losses on that leg of the swap.

But when I say "free" I'm only talking about the financing cost of the swap: LIBOR + spread. The spread would almost certainly be negative (just as it is now), as the counterparty would be super eager to offload the LTT's losses to TMF.
So, I see what you are saying.

However, I would decompose the returns of the strategy in a different way:

1.1. Long 3x Long part of the treasury, short 3x short term rates aka LIBOR (times 60%),
1.2. Long 3x Stocks, short 3x short term rates LIBOR (times 40%),
2. Pay trading costs (by the ETF when rebalancing),
3.1. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on treasury leg (x 60%),
3.2. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on stock leg (x 40%),
4. Pay expense ratio (investor to ETF management).

So you are saying that #3.1 is not a cost, but a profit.

I think I have been arguing that:
A. 1.1 is tied to the steepness of the yield curve. Currently, the yield curve is flat, so profit from 1.1 is small. When the curve goes negative, it will be a source of losses for the strategy,
B. When recession hits, I think your spread on financing (3.1 and 3.2) *COULD RISE*. Why? Because history says so.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 11:45 am

AlphaLess wrote:
Sun Feb 24, 2019 10:18 am
So, I see what you are saying.

However, I would decompose the returns of the strategy in a different way:

1.1. Long 3x Long part of the treasury, short 3x short term rates aka LIBOR (times 60%),
1.2. Long 3x Stocks, short 3x short term rates LIBOR (times 40%),
2. Pay trading costs (by the ETF when rebalancing),
3.1. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on treasury leg (x 60%),
3.2. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on stock leg (x 40%),
4. Pay expense ratio (investor to ETF management).

So you are saying that #3.1 is not a cost, but a profit.

I think I have been arguing that:
A. 1.1 is tied to the steepness of the yield curve. Currently, the yield curve is flat, so profit from 1.1 is small. When the curve goes negative, it will be a source of losses for the strategy,
B. When recession hits, I think your spread on financing (3.1 and 3.2) *COULD RISE*. Why? Because history says so.
I like your decomposition of return. Here is what I would add:

1.1. Long 3x the total return of the Long part of the treasury, short 3x short term rates aka LIBOR (times 60%),
1.2. Long 3x the total return of Stocks, short 3x short term rates LIBOR (times 40%),
1.3 Earn interest income on cash and money market held for collateral and liquidity,
2. Pay trading costs (by the ETF when rebalancing),
3.1. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on treasury leg (x 60%),
3.2. Pay financing spread (as short term rates at LIBOR are only accessible to certain participants) on stock leg (x 40%),
4. Pay expense ratio (investor to ETF management).

For 1.1, you’re right that profit on the yield spread is small at a time like this, but yield is only one part of total return. Price is the other, and can still drive solid gains in an environment like now.

For 3.1, it is expectations of LTT’s total return that matters. If LTT total return is expected to go up, the LIBOR spread will be higher than if total return is expected to go down. When a recession hits I would actually expect LTT’s total return to go up initially (driven by price), and spreads over LIBOR to receive that total return to also go up, so I guess I agree with you there.

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

Post by garlandwhizzer » Sun Feb 24, 2019 12:46 pm

I'm old fashioned. Having been burned by leverage in the past, I have no desire use it any more and avoid it. Leverage may or may not increase long term returns (period dependent) but it always increases risk. Also having been burned by portfolios that appealed in theory and looked like a free lunch on backtesting, I no longer have the desire to institute a seemingly sophisticated portfolio that looks like a free risk/reward lunch on historical backtesting. Put simply, past results do not reliably predict future results except in very limited form. If they did all of us who can do arithmetic would get very rich. Markets are incredibly complex, constantly changing in line with investor sentiment,economic and geopolitical swings and in my opinion that complexity offers very limited possibilities for reliable and consistent future predictions. A few basic principals hold up. Quality bonds are far less volatile than stocks or risk assets of any type, but they are expected to produce lower long term returns. In general there is a tradeoff between risk and reward but this is not always true. I personally would not touch a risk parity strategy using 3X leveraged ETFs with a ten foot pole. Regardless of how good it looks in theory and on backtesting, I suspect that going forward it will not create some new niche where lower risk is rewarded to a greater extent than the market does. If that were reliably the case one would expect active managers, hedge funds, and private equity to be all over it. The search for a better investing mousetrap has been going for many decades and most who have tried to achieve it have failed. I am not sure whether this leveraged approach will work or not. I hope it does for the sake of those who try it. I am not tempted to be one of them.

Garland Whizzer

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

Post by MotoTrojan » Sun Feb 24, 2019 1:25 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 1:51 pm

MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.

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

Post by MotoTrojan » Sun Feb 24, 2019 2:11 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 1:51 pm
MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.
Thanks I will look into this. Still would appreciate your spark-notes summary on why this isn't something you have implemented; simply the expected higher correlation to equities?

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 2:13 pm

MotoTrojan wrote:
Sun Feb 24, 2019 2:11 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 1:51 pm
MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.
Thanks I will look into this. Still would appreciate your spark-notes summary on why this isn't something you have implemented; simply the expected higher correlation to equities?
Lower correlation, yes.

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

Post by MotoTrojan » Sun Feb 24, 2019 2:17 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 2:13 pm
MotoTrojan wrote:
Sun Feb 24, 2019 2:11 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 1:51 pm
MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.
Thanks I will look into this. Still would appreciate your spark-notes summary on why this isn't something you have implemented; simply the expected higher correlation to equities?
Lower correlation, yes.
Thanks, yes I meant the 10-year would be higher.

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

Post by PluckyDucky » Sun Feb 24, 2019 3:25 pm

How far back have the people doing simulations gotten the SPX daily data? CBOE has it back to January 1986. Yahoo appears to go back to 1950.

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

Post by MotoTrojan » Sun Feb 24, 2019 3:58 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 1:51 pm
MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.
Any pointers on why EDV is a good substitute exposure wise if it is based on 20-30 year treasuries? Leverage aside wouldn't that make it much more susceptible to rising interest rates, and thus it would not really hedge against that and just act as a lesser/zero leveraged TMF?

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 4:01 pm

MotoTrojan wrote:
Sun Feb 24, 2019 3:58 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 1:51 pm
MotoTrojan wrote:
Sun Feb 24, 2019 1:25 pm
HEDGEFUNDIE wrote:
Sun Feb 24, 2019 9:48 am


It turns out Leveraged long treasuries do the work of timing better than actually timing the markets.
Curious if you feel there is any place at all for intermediate (10 year) treasuries in this strategy? Data doesn't go back as far but it seems moving ~1/4 - 1/3 of the treasuries to 10 year improves sharpe with a small reduction in return and a larger reduction in volatility. Also could be a hedge to rising interest rates (period I checked did not have as such).
Only suggestion I have is if you were intent on going this way, to use EDV instead of TYD. Similar exposure without any leverage involved.
Any pointers on why EDV is a good substitute exposure wise if it is based on 20-30 year treasuries? Leverage aside wouldn't that make it much more susceptible to rising interest rates, and thus it would not really hedge against that and just act as a lesser/zero leveraged TMF?
But if you're leveraging up 10 year Ts you get the equivalent exposure as unleveraged 20-30 year Ts.

The medium end of the yield curve and the long end of the yield curve usually behave similarly.

At least with EDV you're saving on borrowing costs and ER.

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

Post by PluckyDucky » Sun Feb 24, 2019 5:39 pm

MotoTrojan wrote:
Thu Feb 21, 2019 4:07 pm
I thought the overall ratio of up vs. down was close to 1. Magnitude is the difference maker.
So I decided to look at the data myself. I downloaded the SPX data from Yahoo which goes back to 1950.

Overall, there were 17361 trading days from 1950 - 2018.

I couldn't find the SPX value on 12/31/1949, so I assumed 1/3/1950 was an up day.

Overall, 9191 (52.94%) were up and 8170 (47.06%) were down.

However, if you look at up years vs down years, the picture is a little different.

There were 68 total years. 50 (73.53%) were up while 18 (26.47%) were down.

In up years, there were 12,575 trading days with 6865 (54.59%) up.

In down years, there were 4786 trading days with 2326 (48.60%) up.

So there is a slight bias towards having up days in up years. I didn't look at the magnitudes of up vs down days.

How much does this bias towards up days in up years change a leveraged fund performance?

And just for fun, here is a comparison of SPX since 1950 to 3X daily SPX where each days % gain or loss is used to modify the 3x fund value each day. (I know this doesn't account for expense ratio, etc as discussed in the simulation thread).

Yes, the blue smudge at the bottom is SPX.

Image
Last edited by PluckyDucky on Sun Feb 24, 2019 6:15 pm, edited 4 times in total.

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 5:58 pm

PluckyDucky wrote:
Sun Feb 24, 2019 5:39 pm
MotoTrojan wrote:
Thu Feb 21, 2019 4:07 pm
I thought the overall ratio of up vs. down was close to 1. Magnitude is the difference maker.
So I decided to look at the data myself. I downloaded the SPX data from Yahoo which goes back to 1950.

Overall, there were 17361 trading days from 1950 - 2018.

I couldn't find the SPX value on 12/31/1949, so I assumed 1/3/1950 was an up day.

Overall, 9191 (52.94%) were up and 8170 (47.06%) were down.

However, if you look at up years vs down years, the picture is a little different.

There were 68 total years. 50 (73.53%) were up while 18 (26.47%) were down.

In up years, there were 12,575 trading days with 6865 (54.59%) up.

In down years, there were 4786 trading days with 2326 (48.60%) up.

So there is a slight bias towards having up days in up years. I didn't look at the magnitudes of up vs down days.

How much does this bias towards up days in up years change a leveraged fund performance?
So years with more up days than down days tend to be up years. I wouldn’t call that a “bias” more like common sense.

It’s good to know that there are more up days than down days. That is a good thing for this strategy.

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

Post by michaeljc70 » Sun Feb 24, 2019 6:09 pm

I'm confused. Under What is your strategy in the OP, it doesn't really state the strategy. I haven't been here in a while. I thought originally this was tied to an unemployment rate and other stuff. It seems to have changed quite a bit unless I am confusing it with another thread.

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

Post by staythecourse » Sun Feb 24, 2019 6:22 pm

michaeljc70 wrote:
Sun Feb 24, 2019 6:09 pm
I'm confused. Under What is your strategy in the OP, it doesn't really state the strategy. I haven't been here in a while. I thought originally this was tied to an unemployment rate and other stuff. It seems to have changed quite a bit unless I am confusing it with another thread.
Believe that is the market timing thread.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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

Post by Kevin M » Sun Feb 24, 2019 6:31 pm

siamond wrote:
Sun Feb 24, 2019 12:19 am
Kevin M wrote:
Sat Feb 23, 2019 1:13 pm
You might also look at forum member longinvest's work on simulating bond fund returns from yields, with self-correction incorporated. This is the method used to get proxy returns for various bond funds included in the Simba/siamond backtest spreadsheet, but I believe it has been implemented for annual returns only. I haven't read the related methodology thread--maybe this was brought up there?
Yes, this was raised quite a few posts ago, and AlohaJoe was kind enough to provide monthly 'proxy' returns for long-term bonds in this post. This input wasn't used yet in leveraged simulations, I believe, but I plan to do it. Now as to moving to daily returns, this would be something new. Maybe we could ask AlohaJoe if it could be a reasonable project to explore.
Thanks for the update.

One thing to consider is that the FRB data includes 9-year, 19-year and 29-year yields, so less linear interpolation is required. On the flip side, the 10/9-year starts 1971-08-16, the 19/20-year on 1981-07-02, and the 29/30-year on 1985-11-25, so you can't go back as far as with the 10-year CMT data. There are reasons they didn't publish data for earlier years.

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

Post by dave_k » Sun Feb 24, 2019 6:33 pm

Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
PluckyDucky wrote:
Sun Feb 24, 2019 5:39 pm
Image

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 6:34 pm

dave_k wrote:
Sun Feb 24, 2019 6:33 pm
Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
PluckyDucky wrote:
Sun Feb 24, 2019 5:39 pm
Image
Or if it included 3x Daily Long Treasuries (yes I realize that data isn’t readily available).

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

Post by PluckyDucky » Sun Feb 24, 2019 6:39 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 6:34 pm
dave_k wrote:
Sun Feb 24, 2019 6:33 pm
Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
PluckyDucky wrote:
Sun Feb 24, 2019 5:39 pm
Image
Or if it included 3x Daily Long Treasuries (yes I realize that data isn’t readily available).
If you can get me a data set for treasuries, I'll add it.

Was there one in the simulation thread?

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

Post by PluckyDucky » Sun Feb 24, 2019 6:46 pm

dave_k wrote:
Sun Feb 24, 2019 6:33 pm
Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
Here you go:

Image

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 6:49 pm

PluckyDucky wrote:
Sun Feb 24, 2019 6:46 pm
dave_k wrote:
Sun Feb 24, 2019 6:33 pm
Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
Here you go:

Image
So much for “volatility decay”! :mrgreen:

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

Post by dave_k » Sun Feb 24, 2019 6:55 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 6:49 pm
PluckyDucky wrote:
Sun Feb 24, 2019 6:46 pm
dave_k wrote:
Sun Feb 24, 2019 6:33 pm
Interesting, thanks, but this plot would be much more meaningful if it was logarithmic:
Here you go:

Image
So much for “volatility decay”! :mrgreen:
Thanks! It doesn't take borrowing costs or ER into account though, does it?

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

Post by PluckyDucky » Sun Feb 24, 2019 6:56 pm

dave_k wrote:
Sun Feb 24, 2019 6:55 pm
Thanks! It doesn't take borrowing costs or ER into account though, does it?
Nope, it is just taking the daily % G/L from SPX and modifying the 3X "fund" with the daily % G/L each day. No dividends are considered either.

If you had been holding since 1950, you lost 97.66% of your value from 2000 to 2010, and yet you still way outperformed SPX. :oops:

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

Post by HEDGEFUNDIE » Sun Feb 24, 2019 7:05 pm

PluckyDucky wrote:
Sun Feb 24, 2019 6:56 pm
dave_k wrote:
Sun Feb 24, 2019 6:55 pm
Thanks! It doesn't take borrowing costs or ER into account though, does it?
Nope, it is just taking the daily % G/L from SPX and modifying the 3X "fund" with the daily % G/L each day. No dividends are considered either.

If you had been holding since 1950, you lost 97.66% of your value from 2000 to 2010, and yet you still way outperformed SPX. :oops:
For a true buy-and-hold investor with multigenerational goals, this chart should be all one needs to see.

The next question is, would you be better off with a leveraged balanced portfolio over the super long term instead of 100% S&P? An unanswerable question without the bond price data. Certainly you would not suffer as many 97% drawdowns, but for a multigenerational investor, volatility and drawdowns may be entirely irrelevant.

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

Post by PluckyDucky » Sun Feb 24, 2019 7:18 pm

HEDGEFUNDIE wrote:
Sun Feb 24, 2019 7:05 pm
For a true buy-and-hold investor with multigenerational goals, this chart should be all one needs to see.

The next question is, would you be better off with a leveraged balanced portfolio over the super long term instead of 100% S&P? An unanswerable question without the bond price data. Certainly you would not suffer as many 97% drawdowns, but for a multigenerational investor, volatility and drawdowns may be entirely irrelevant.
Let's say you started 1/2/1973 instead of 1/3/1950. It isn't so rosy, although I can't forecast an extra 20 years to see how it looks over the same amount of time. '73 had an 18% drop and '74 had a 31% drop. Not a pretty sight. Still, in the really long run, it appears 3X Daily will outperform.

https://en.wikipedia.org/wiki/1973%E2%8 ... rket_crash

That said, anybody considering 100% UPRO should probably wait until AFTER the next crash before starting it. :twisted: I wish I could get my hands on some daily data for bonds going back to 1950 also.

Image

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

Post by michaeljc70 » Sun Feb 24, 2019 7:39 pm

staythecourse wrote:
Sun Feb 24, 2019 6:22 pm
michaeljc70 wrote:
Sun Feb 24, 2019 6:09 pm
I'm confused. Under What is your strategy in the OP, it doesn't really state the strategy. I haven't been here in a while. I thought originally this was tied to an unemployment rate and other stuff. It seems to have changed quite a bit unless I am confusing it with another thread.
Believe that is the market timing thread.

Good luck.
Okay. I'll look more into it. The OP has been edited 77 times though....

It might be best to list updates/revisions by date. People respond and then the post has changed so many times.

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

Post by siamond » Sun Feb 24, 2019 7:53 pm

Kevin M wrote:
Sun Feb 24, 2019 6:31 pm
siamond wrote:
Sun Feb 24, 2019 12:19 am
Kevin M wrote:
Sat Feb 23, 2019 1:13 pm
You might also look at forum member longinvest's work on simulating bond fund returns from yields, with self-correction incorporated. This is the method used to get proxy returns for various bond funds included in the Simba/siamond backtest spreadsheet, but I believe it has been implemented for annual returns only. I haven't read the related methodology thread--maybe this was brought up there?
Yes, this was raised quite a few posts ago, and AlohaJoe was kind enough to provide monthly 'proxy' returns for long-term bonds in this post. This input wasn't used yet in leveraged simulations, I believe, but I plan to do it. Now as to moving to daily returns, this would be something new. Maybe we could ask AlohaJoe if it could be a reasonable project to explore.
One thing to consider is that the FRB data includes 9-year, 19-year and 29-year yields, so less linear interpolation is required. On the flip side, the 10/9-year starts 1971-08-16, the 19/20-year on 1981-07-02, and the 29/30-year on 1985-11-25, so you can't go back as far as with the 10-year CMT data. There are reasons they didn't publish data for earlier years.
We actually have the Bloomberg Barclays US Treasury Long TR USD data series which starts on 12/29/1972. The simulation model (of leveraged funds) we assembled so far (see this separate thread where you're welcome to provide feedback) relies on such index data, as well as the S&P 500, starting from 12/31/1972.

Unfortunately, the data in the first two decades of this data series (the Barclays index) years is monthly. And since leveraged funds returns suffer from decay due to short-term volatility, the model is (for now) overly optimistic for this time period. Maybe we could do a simple coarse adjustment based on average daily volatility (for recent decades) as I suggested here, or... we try to expand longinvest's model towards daily numbers. I would be inclined to explore the former to begin with. But one thing at a time, we still have some kinks in the model -- it does not match actuals very well (at least for stocks funds).
Last edited by siamond on Sun Feb 24, 2019 7:57 pm, edited 1 time in total.

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

Post by BrooklynInvest » Sun Feb 24, 2019 7:57 pm

I don't get this at all but there's a lot that's well over my head.

Backtesting embeds 30 years of great bond returns but am pretty sure rates aint gonna drop another 1,500 bps from here. Does the drag of borrowing costs and bond returns approximating 10 year yields wreck this whole hypothesis or no? Even if correlations hold for the most part.

Locked