Just a friendly shout to all the triple-leverage speculators here, from a casual observer:
- you will have less anxiety if you decompose your returns of the leveraged strategy into simple explanatory factors.
F1: Long the stock, short the funding rate, x 3. Add-in daily re-leverage / re-balance: see F5.
F2: Long the LT treasuries, short the funding rate, x 3. Add-in daily re-leverage / re-balance: see F6,
F3: Long your capital (which presumably earns short funding rate),
F4: Expense ratio,
F5: Gamma from daily re-leverage,
F6. Gamma from daily re-leverage.
F7: Your quarterly rebalance,
F2. probably won't make money if yield curve is flattish (like now). Can look it up here: https://www.treasury.gov/resource-cente ... data=yield
. Remember that funding rate is not the front end of the treasury, but what the ETF manager borrows at. Prolly LIBOR+, which stands at 2.6% + currently.
F1. probably won't make money if the front end of the yield curve is high (relative to stocks). This has two dimensions: funding rate and stock returns. Stock valuations are high, and returns are uncertain. Funding rate is certain: you pay every day,
F5: daily re-leverage eats into your returns.
F6: daily re-leverage eats into your returns.
F7: your quarterly rebalance probably has absolutely no alpha.
Furthermore, you expect that F2 to hedge F1 (simple treasury-vs-stock hedge) during times of crisis. However, the funding rate you face is on the faith and credit of the ETF manager, and that could be higher than what you read in papers. Thus, your paper portfolio visualizer simulation might not hold up.
Also remember that yield curve like to spend vacationing in inverted territories.
"You can get more with a kind word and a gun than with just a kind word." George Washington