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

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

Post by privatefarmer » Sat Apr 13, 2019 6:55 pm

MotoTrojan wrote:
Sat Apr 13, 2019 5:28 pm
privatefarmer wrote:
Sat Apr 13, 2019 1:51 pm
mffl wrote:
Sat Apr 13, 2019 11:00 am
DonIce wrote:
Fri Apr 12, 2019 1:39 pm
garlandwhizzer wrote:
Fri Apr 12, 2019 1:22 pm
I find it fascination that in the Bogleheads Forum, there are 31 pages of posts about a 3X leverage ETF strategy which is a far cry from what Bogle himself advocated. Granted, it is a very interesting strategy and it backtests very well. The question of course is does backtesting accurately define what will unfold in the future. Mr. Market seems to enjoy being unpredictable and frustrating the experts who try to define its behavior in the future. Time will tell, but I'm too old and have been burned too many times with seemingly brilliant strategies to try another one.
I dunno, makes perfect sense to me that there would be lots of discussion on this. Obviously, the typical boglehead strategy is well understood on this forum. Invest in a few low cost index funds at a reasonable ratio of stocks and bonds. There's a 50 page thread on it stickied at the top of the forums. When new people come to the forum and ask about how they should invest, they are invariably given advice along the lines of this general boglehead strategy.

But for long time forum members that like to think about things and chat about finances/investments, clearly the topics that will engender deeper and longer discussion is riskier strategies, untested strategies, new ideas, etc.
Right, and I think that to the extent that this is a simple, buy and hold strategy that deviates from standard Boglehead philosophy in only one dimension (leverage), that means it's at least Boglehead-adjacent *IF* one keeps it to that 5% play money portion of your portfolio. I think the 5% play money thing is reasonably accepted around here assuming it helps you get it out of your system keep your activist instincts away from the main 95% of your portfolio. As someone who's in on this myself for about 1% of investable assets and may go up to 5%, I think the danger here is getting too excited and instead of helping contain non-Boglehead behavior to your play money, it bleeds over into a larger portion of your portfolio. So, to the extent that you can keep yourself under control, this is relatively harmless with some great upside. If you can't control yourself, this is suddenly very un-Bogleheadish and dangerous. The backtests and theory make it an excellent play money strategy. But as garlandwhizzer suggested, there have been countless can't lose strategies over the years, and the probability that something goes dramatically off the rails here is low enough to play around with, but high enough such that it's wise to keep exposure low, as most posters here are doing. The few that have gone hog wild with this should be very careful.
Agree to disagree I suppose. I look at this from a very top-down approach. For those who are young, have solid incomes, positive monthly cash flow, strong career prospects, and even own a home I believe even having all available liquid investments in this strategy can be reasonable. What we have to remember is that it is a RISK PARITY strategy. We like to focus on the leverage part but we have to remember the underlying assets and strategy of diversify risk. Also, going heavy into this strategy may seem extreme to the average boglehead but maybe not to most of the investing world. MANY “investors” throw everything they have at HIGHLY leveraged rental properties. Or even worse, take out a massive personal loan to invest in a restaurant or some other business idea. Everything is relative I suppose. I look at my TOTAL net worth and see 1) two very solid W2 income streams in a field of healthcare in high demand 2) our house, which makes up 50% of our total assets and then 3) this strategy which makes up the other half. I also have dedicated emerging markets, unleveraged, as my 401k allocation to add more diversification.
We can also agree to disagree. Your plan worries me especially because it has changed at least once based on a single comment. Will you stick with this after an 80% drawdown?

an 80% drawdown in just the TMF/UPRO allocation? That did happen during the 70s according to the simulations, but I think that kind of stagflation is unlikely. If it happened, however, then hopefully my house (50% of assets) and my W2 income would appreciate in value. So hopefully my total net worth would not decline by 80%. But anything is possible I suppose.

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

Post by Random Musings » Sat Apr 13, 2019 7:56 pm

interesting concept, but I could not tolerate that amount of potential drawdown.

The true test will be actual, not hypothetical returns as well as who can really stomach such a massive drawdown, if it does occur. No different than a 100% equity person who has to stomach a big bear. Many people bail as they realize their tolerance for risk, once reality occurs, is not as high as that thought it was.

For those who try, I would put a toe in the water, no more than 5%.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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

Post by typical.investor » Sat Apr 13, 2019 7:57 pm

privatefarmer wrote:
Sat Apr 13, 2019 6:55 pm
MotoTrojan wrote:
Sat Apr 13, 2019 5:28 pm

We can also agree to disagree. Your plan worries me especially because it has changed at least once based on a single comment. Will you stick with this after an 80% drawdown?

an 80% drawdown in just the TMF/UPRO allocation? That did happen during the 70s according to the simulations, but I think that kind of stagflation is unlikely. If it happened, however, then hopefully my house (50% of assets) and my W2 income would appreciate in value. So hopefully my total net worth would not decline by 80%. But anything is possible I suppose.
What about your significant other?

There was an interesting thread recently where the OP wanted his wife to ditch her financial advisor, but she didn't want to listen to him based on the previous performance of some of his investment decisions even though he was on the straight and narrow Boglehead road now.

Young people who jump in before meeting their spouse could have some 'splainin to do down the road when finances come up.

This is especially true if kids come along and you are in a "more expensive house in good school district" or "private school" discussion and this part of your assets are doing poorly. Even if you are sure they will recover in time, it could be difficult to get the spouse on board if they look at other holdings (ie. Total Market, Total Bond) doing better and suggest "why don't we just use these".

My point is simply that deciding on whether to hold or not, or add more money or not after a 60-80% drop (i.e. something worse than market performance and so worrying) might not be only your decision. If we see years of poor performance to due the volatility in a sideways market, and then a big drop ... alls I can say is my spouse puts her offspring over anything I could possible say first.

So limiting the amount is this strategy is certainly a good idea I think.
privatefarmer wrote:
Sat Apr 13, 2019 1:51 pm
I look at this from a very top-down approach. For those who are young, have solid incomes, positive monthly cash flow, strong career prospects, and even own a home I believe even having all available liquid investments in this strategy can be reasonable.
Everyone is in a different situation I guess, but that'd likely end up in a divorce for me. My spouse wouldn't accept me subjecting her to that much risk. She prefers to take risk at work (and maybe lose her job) and have safe assets. And she became much, much less risk tolerant overall as soon as she became pregnant. Not your spouse, I know. Just saying to consider them.
Last edited by typical.investor on Sat Apr 13, 2019 8:08 pm, edited 1 time in total.

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

Post by sarabayo » Sat Apr 13, 2019 8:04 pm

dave_k wrote:
Fri Apr 12, 2019 1:34 pm
I think the reason that it appeals to many Bogleheads (including myself) is that it's a simple two fund stock/bond index portfolio with periodic rebalancing, with long term returns (buy and hold) as the goal. The main difference from a typical Boglehead portfolio is the leverage, which increases the risk, and that's why it's best done with a small portion of the portfolio according to risk tolerance.
Isn't the choice of long-term treasuries rather than a total bond index another deviation from the usual Boglehead two-fund portfolio? I thought an important aspect of this strategy was that it relies on a flight-to-safety effect into long term treasuries when the S&P 500 dips.

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

Post by mffl » Sat Apr 13, 2019 8:14 pm

privatefarmer wrote:
Sat Apr 13, 2019 6:55 pm
MotoTrojan wrote:
Sat Apr 13, 2019 5:28 pm
privatefarmer wrote:
Sat Apr 13, 2019 1:51 pm
mffl wrote:
Sat Apr 13, 2019 11:00 am
DonIce wrote:
Fri Apr 12, 2019 1:39 pm


I dunno, makes perfect sense to me that there would be lots of discussion on this. Obviously, the typical boglehead strategy is well understood on this forum. Invest in a few low cost index funds at a reasonable ratio of stocks and bonds. There's a 50 page thread on it stickied at the top of the forums. When new people come to the forum and ask about how they should invest, they are invariably given advice along the lines of this general boglehead strategy.

But for long time forum members that like to think about things and chat about finances/investments, clearly the topics that will engender deeper and longer discussion is riskier strategies, untested strategies, new ideas, etc.
Right, and I think that to the extent that this is a simple, buy and hold strategy that deviates from standard Boglehead philosophy in only one dimension (leverage), that means it's at least Boglehead-adjacent *IF* one keeps it to that 5% play money portion of your portfolio. I think the 5% play money thing is reasonably accepted around here assuming it helps you get it out of your system keep your activist instincts away from the main 95% of your portfolio. As someone who's in on this myself for about 1% of investable assets and may go up to 5%, I think the danger here is getting too excited and instead of helping contain non-Boglehead behavior to your play money, it bleeds over into a larger portion of your portfolio. So, to the extent that you can keep yourself under control, this is relatively harmless with some great upside. If you can't control yourself, this is suddenly very un-Bogleheadish and dangerous. The backtests and theory make it an excellent play money strategy. But as garlandwhizzer suggested, there have been countless can't lose strategies over the years, and the probability that something goes dramatically off the rails here is low enough to play around with, but high enough such that it's wise to keep exposure low, as most posters here are doing. The few that have gone hog wild with this should be very careful.
Agree to disagree I suppose. I look at this from a very top-down approach. For those who are young, have solid incomes, positive monthly cash flow, strong career prospects, and even own a home I believe even having all available liquid investments in this strategy can be reasonable. What we have to remember is that it is a RISK PARITY strategy. We like to focus on the leverage part but we have to remember the underlying assets and strategy of diversify risk. Also, going heavy into this strategy may seem extreme to the average boglehead but maybe not to most of the investing world. MANY “investors” throw everything they have at HIGHLY leveraged rental properties. Or even worse, take out a massive personal loan to invest in a restaurant or some other business idea. Everything is relative I suppose. I look at my TOTAL net worth and see 1) two very solid W2 income streams in a field of healthcare in high demand 2) our house, which makes up 50% of our total assets and then 3) this strategy which makes up the other half. I also have dedicated emerging markets, unleveraged, as my 401k allocation to add more diversification.
We can also agree to disagree. Your plan worries me especially because it has changed at least once based on a single comment. Will you stick with this after an 80% drawdown?

an 80% drawdown in just the TMF/UPRO allocation? That did happen during the 70s according to the simulations, but I think that kind of stagflation is unlikely. If it happened, however, then hopefully my house (50% of assets) and my W2 income would appreciate in value. So hopefully my total net worth would not decline by 80%. But anything is possible I suppose.
Why would your W2 income and home appreciate in a situation where bonds and stocks have both dropped dramatically? An 80% drawdown in TMF/UPRO is a messed up economic situation.

You've obviously got time on your side, no doubt. That is a major factor in allowing you to take on more risk. But your unrealized human capital is as volatile and risky or more so than the stock market, until the respective paychecks clear. You've already got plenty of risk exposure.

Keep in mind, some of this feedback is coming from people who are otherwise high on this strategy, and who are similarly young with lots of human capital left. This isn't us trying to be right, it's just trying to temper your enthusiasm a bit.

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

Post by dave_k » Sat Apr 13, 2019 8:47 pm

sarabayo wrote:
Sat Apr 13, 2019 8:04 pm
dave_k wrote:
Fri Apr 12, 2019 1:34 pm
I think the reason that it appeals to many Bogleheads (including myself) is that it's a simple two fund stock/bond index portfolio with periodic rebalancing, with long term returns (buy and hold) as the goal. The main difference from a typical Boglehead portfolio is the leverage, which increases the risk, and that's why it's best done with a small portion of the portfolio according to risk tolerance.
Isn't the choice of long-term treasuries rather than a total bond index another deviation from the usual Boglehead two-fund portfolio? I thought an important aspect of this strategy was that it relies on a flight-to-safety effect into long term treasuries when the S&P 500 dips.
True, I was over-simplifying.

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

Post by privatefarmer » Sun Apr 14, 2019 12:18 am

mffl wrote:
Sat Apr 13, 2019 8:14 pm
privatefarmer wrote:
Sat Apr 13, 2019 6:55 pm
MotoTrojan wrote:
Sat Apr 13, 2019 5:28 pm
privatefarmer wrote:
Sat Apr 13, 2019 1:51 pm
mffl wrote:
Sat Apr 13, 2019 11:00 am


Right, and I think that to the extent that this is a simple, buy and hold strategy that deviates from standard Boglehead philosophy in only one dimension (leverage), that means it's at least Boglehead-adjacent *IF* one keeps it to that 5% play money portion of your portfolio. I think the 5% play money thing is reasonably accepted around here assuming it helps you get it out of your system keep your activist instincts away from the main 95% of your portfolio. As someone who's in on this myself for about 1% of investable assets and may go up to 5%, I think the danger here is getting too excited and instead of helping contain non-Boglehead behavior to your play money, it bleeds over into a larger portion of your portfolio. So, to the extent that you can keep yourself under control, this is relatively harmless with some great upside. If you can't control yourself, this is suddenly very un-Bogleheadish and dangerous. The backtests and theory make it an excellent play money strategy. But as garlandwhizzer suggested, there have been countless can't lose strategies over the years, and the probability that something goes dramatically off the rails here is low enough to play around with, but high enough such that it's wise to keep exposure low, as most posters here are doing. The few that have gone hog wild with this should be very careful.
Agree to disagree I suppose. I look at this from a very top-down approach. For those who are young, have solid incomes, positive monthly cash flow, strong career prospects, and even own a home I believe even having all available liquid investments in this strategy can be reasonable. What we have to remember is that it is a RISK PARITY strategy. We like to focus on the leverage part but we have to remember the underlying assets and strategy of diversify risk. Also, going heavy into this strategy may seem extreme to the average boglehead but maybe not to most of the investing world. MANY “investors” throw everything they have at HIGHLY leveraged rental properties. Or even worse, take out a massive personal loan to invest in a restaurant or some other business idea. Everything is relative I suppose. I look at my TOTAL net worth and see 1) two very solid W2 income streams in a field of healthcare in high demand 2) our house, which makes up 50% of our total assets and then 3) this strategy which makes up the other half. I also have dedicated emerging markets, unleveraged, as my 401k allocation to add more diversification.
We can also agree to disagree. Your plan worries me especially because it has changed at least once based on a single comment. Will you stick with this after an 80% drawdown?

an 80% drawdown in just the TMF/UPRO allocation? That did happen during the 70s according to the simulations, but I think that kind of stagflation is unlikely. If it happened, however, then hopefully my house (50% of assets) and my W2 income would appreciate in value. So hopefully my total net worth would not decline by 80%. But anything is possible I suppose.
Why would your W2 income and home appreciate in a situation where bonds and stocks have both dropped dramatically? An 80% drawdown in TMF/UPRO is a messed up economic situation.

You've obviously got time on your side, no doubt. That is a major factor in allowing you to take on more risk. But your unrealized human capital is as volatile and risky or more so than the stock market, until the respective paychecks clear. You've already got plenty of risk exposure.

Keep in mind, some of this feedback is coming from people who are otherwise high on this strategy, and who are similarly young with lots of human capital left. This isn't us trying to be right, it's just trying to temper your enthusiasm a bit.
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.

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

Post by mffl » Sun Apr 14, 2019 7:38 am

privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.

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

Post by privatefarmer » Sun Apr 14, 2019 8:57 am

mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
I suppose my line of thinking is more along what Dr Ayres professes in “lifecycle investing”. I am front loading my early years with a very aggressive portfolio in hopes of hitting FI sooner at which point I will begin to deleverage.

I know the leveraged ETFs are a different animal but the way I’m looking st my portfolio as a whole is not much different than if it were 100% equities. What I mean is the standard deviation/max drawdown of the entire portfolio is more so than 100% equities but not by 3x, it’s more like 1.5x.

For someone who is young, accumulating, is it that unreasonable to be 100% equities and be carrying a mortgage and student loan debt? Because that person would be far more than 100% equities when you factor in their leverage. Common advice is it’s okay to be 100% equities and carry a mortgage while saving for retirement even though this is exactly the same as using leverage to invest.

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

Post by privatefarmer » Sun Apr 14, 2019 9:06 am

mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
To put it all out there: 35 year old pharmacist and my wife is a 36yo nurse, house is 600k, investable paper assets including 401ks and IRAs are 600k, household income about 200k giving us about an annual positive cash flow of ~36k after paying all bills and mortgage. Debt including mortgage is all <4% APR and comes out to about 600k total. In aggregate my net worth right around 600k (assets 1.2mil and debt 600k). SO.... a 50% drawdown in all my assets including my house would bring my NW to zero. I am HOPING that in 5-10yrs my NW will hit 1.5mil and I’ll at that point deleverage and shift to a traditional balanced portfolio or at the very worst be 100% global equities. Following this strategy I anticipate may speed that up by MAYBE a year, it may not make any difference whatsoever vs being 100% equities OR it could delay hitting FI by a year or two (compared to being 100% equities). All estimations, anything can happen, just using all available data to make best educated guess as to how to invest moving forward.

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

Post by gtwhitegold » Sun Apr 14, 2019 11:09 am

For anyone considering to implement a leveraged portfolio, but is not sure how to wind it down or consider 3x leverage too much, it's probably better to continue to use the 3x leveraged ETFs, but substitute a 1x ETF for the remainder of the allocation. This will also work if you are planning on tilting or including assets that aren't available leveraged. The one exception to this is for US small caps. Since there isn't a 3x ETF that tracks the S&P 600 index, you're likely better off using SAA which is a 2x S&P 600 ETF vice using a Russell 2000 2x or 3x ETF.

Also, it looks like the ProShares ETFs track better than the Direxion ETFs in general.

pdavi21
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by pdavi21 » Sun Apr 14, 2019 12:06 pm

privatefarmer wrote:
Sun Apr 14, 2019 8:57 am
mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
I suppose my line of thinking is more along what Dr Ayres professes in “lifecycle investing”. I am front loading my early years with a very aggressive portfolio in hopes of hitting FI sooner at which point I will begin to deleverage.

I know the leveraged ETFs are a different animal but the way I’m looking st my portfolio as a whole is not much different than if it were 100% equities. What I mean is the standard deviation/max drawdown of the entire portfolio is more so than 100% equities but not by 3x, it’s more like 1.5x.

For someone who is young, accumulating, is it that unreasonable to be 100% equities and be carrying a mortgage and student loan debt? Because that person would be far more than 100% equities when you factor in their leverage. Common advice is it’s okay to be 100% equities and carry a mortgage while saving for retirement even though this is exactly the same as using leverage to invest.
Not exactly. The mortgage is debt against home value. The home can be sold or foreclosed without liquidating any equities.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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

Post by privatefarmer » Sun Apr 14, 2019 3:50 pm

pdavi21 wrote:
Sun Apr 14, 2019 12:06 pm
privatefarmer wrote:
Sun Apr 14, 2019 8:57 am
mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
I suppose my line of thinking is more along what Dr Ayres professes in “lifecycle investing”. I am front loading my early years with a very aggressive portfolio in hopes of hitting FI sooner at which point I will begin to deleverage.

I know the leveraged ETFs are a different animal but the way I’m looking st my portfolio as a whole is not much different than if it were 100% equities. What I mean is the standard deviation/max drawdown of the entire portfolio is more so than 100% equities but not by 3x, it’s more like 1.5x.

For someone who is young, accumulating, is it that unreasonable to be 100% equities and be carrying a mortgage and student loan debt? Because that person would be far more than 100% equities when you factor in their leverage. Common advice is it’s okay to be 100% equities and carry a mortgage while saving for retirement even though this is exactly the same as using leverage to invest.
Not exactly. The mortgage is debt against home value. The home can be sold or foreclosed without liquidating any equities.
I don’t see the difference. If you have 100k in investments and you owe the bank 100k on a mortgage, you’re using leverage to invest. You’re investing in stocks AND your home but you’re still actively deciding to invest rather than pay off the mortgage.

pdavi21
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by pdavi21 » Sun Apr 14, 2019 4:26 pm

.........
Last edited by pdavi21 on Sun Apr 14, 2019 4:45 pm, edited 1 time in total.
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MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Sun Apr 14, 2019 4:31 pm

privatefarmer wrote:
Sun Apr 14, 2019 8:57 am
mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
I suppose my line of thinking is more along what Dr Ayres professes in “lifecycle investing”. I am front loading my early years with a very aggressive portfolio in hopes of hitting FI sooner at which point I will begin to deleverage.

I know the leveraged ETFs are a different animal but the way I’m looking st my portfolio as a whole is not much different than if it were 100% equities. What I mean is the standard deviation/max drawdown of the entire portfolio is more so than 100% equities but not by 3x, it’s more like 1.5x.

For someone who is young, accumulating, is it that unreasonable to be 100% equities and be carrying a mortgage and student loan debt? Because that person would be far more than 100% equities when you factor in their leverage. Common advice is it’s okay to be 100% equities and carry a mortgage while saving for retirement even though this is exactly the same as using leverage to invest.
Two major problems with your plan in my view:

You are using this to outperform the S&P500 in a 5-10 year period. That seems too short to be worth the risk.

There are fundamental reasons that the global equity market must continue to rise in the long run, without much bigger problems than tracking error. This strategy on the other hand could have a devastating loss without the world halting to spin.

Having said all of that I’m still having fun with ~20% of my liquid net worth in this, but I’m very early in my accumulation years so that % won’t persist. I have a similar amount invested in private company ISOs which could be worthless next year (or give me a 20-30x NW increase in 3-5 years) too, so no stranger to risk, but I’m not looking to be FI in 5-10 years either.

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

Post by mffl » Sun Apr 14, 2019 4:36 pm

privatefarmer wrote:
Sun Apr 14, 2019 3:50 pm
pdavi21 wrote:
Sun Apr 14, 2019 12:06 pm
privatefarmer wrote:
Sun Apr 14, 2019 8:57 am
mffl wrote:
Sun Apr 14, 2019 7:38 am
privatefarmer wrote:
Sun Apr 14, 2019 12:18 am
yeah. I would HOPE that my house would provide some sort of diversification benefit in an inflationary environment but ultimately what is important is that I am able to keep positive cashflow and not have to liquidate during troubled times. Being 100% unleveraged equities is not much safer, IMO, than this strategy. I could be wrong. But I don't have millions of $$$s to lose, my "wealth" is mostly in my future earnings capability. A 50% drawdown vs an 80% honestly would not make THAT big of a difference in terms of actual dollars lost relative to our salary and value of our home. And when I consider that I'll hopefully only be in this "aggressive" accumulation phase for 5-10 years, at which point I hope to hit FI, the odds of going through another stagflation in that time period seem pretty low.
Sure, I mean, to pick a number out of thin air, if you're 100% in on this strategy and you're young and your total investable assets is $1,000, then the sky won't be falling if you lost 80%. You could argue it's instilling bad habits, but as you say, not devastating if you lost it all. At $10,000 maybe it's a similar situation. But at some point before FI you'll be at $100,000 and then $500,000 and then $1,000,000 and then $2,000,000 and maybe more. I don't think your argument for staying at 100% in this strategy scales up towards your FI goal.
I suppose my line of thinking is more along what Dr Ayres professes in “lifecycle investing”. I am front loading my early years with a very aggressive portfolio in hopes of hitting FI sooner at which point I will begin to deleverage.

I know the leveraged ETFs are a different animal but the way I’m looking st my portfolio as a whole is not much different than if it were 100% equities. What I mean is the standard deviation/max drawdown of the entire portfolio is more so than 100% equities but not by 3x, it’s more like 1.5x.

For someone who is young, accumulating, is it that unreasonable to be 100% equities and be carrying a mortgage and student loan debt? Because that person would be far more than 100% equities when you factor in their leverage. Common advice is it’s okay to be 100% equities and carry a mortgage while saving for retirement even though this is exactly the same as using leverage to invest.
Not exactly. The mortgage is debt against home value. The home can be sold or foreclosed without liquidating any equities.
I don’t see the difference. If you have 100k in investments and you owe the bank 100k on a mortgage, you’re using leverage to invest. You’re investing in stocks AND your home but you’re still actively deciding to invest rather than pay off the mortgage.
But you're doing both that AND the leveraged funds, right? Some Bogleheads would tell you not to be be 100% stocks at your age, others would tell you to pay off your mortgage and not borrow to invest. This thread is populated primarily with those of us perfectly comfortable with 100%+ stocks, otherwise this thread would bore us fast. The problem here isn't a problem of strategy as much as it is a problem of scale. To each his own, and perhaps this conversation is an example of just how conservative even us "reckless" Bogleheads are. Obviously I wish you well and hope it works out. But those of us dipping our toes in this strategy with 5% or so of our investable assets are like Bogleheads having a cheat day on their diet. What you're talking about doing is more like something out of /r/wallstreetbets.

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

Post by getjiggy » Sun Apr 14, 2019 9:27 pm

I am new to this forum and unfamiliar with community philosophy but have been an investor for 20+ years including stocks/real estate local and global/options trading etc. As someone always looking to dig into new class of assets or strategies to balance risk vs rewards, I got hooked to this thread’s proposed strategy and allocated some portion. What is the group’s thinking specifically on using say ~5-10% of this strategy to include bitcoin (or GBTC as proxy for retirement accounts) as another uncorrelated asset class with ‘similar’ high risk/reward profile?

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

Post by MotoTrojan » Sun Apr 14, 2019 10:29 pm

getjiggy wrote:
Sun Apr 14, 2019 9:27 pm
I am new to this forum and unfamiliar with community philosophy but have been an investor for 20+ years including stocks/real estate local and global/options trading etc. As someone always looking to dig into new class of assets or strategies to balance risk vs rewards, I got hooked to this thread’s proposed strategy and allocated some portion. What is the group’s thinking specifically on using say ~5-10% of this strategy to include bitcoin (or GBTC as proxy for retirement accounts) as another uncorrelated asset class with ‘similar’ high risk/reward profile?
Not for me. Maybe avocado though.

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

Post by privatefarmer » Sun Apr 14, 2019 10:40 pm

getjiggy wrote:
Sun Apr 14, 2019 9:27 pm
I am new to this forum and unfamiliar with community philosophy but have been an investor for 20+ years including stocks/real estate local and global/options trading etc. As someone always looking to dig into new class of assets or strategies to balance risk vs rewards, I got hooked to this thread’s proposed strategy and allocated some portion. What is the group’s thinking specifically on using say ~5-10% of this strategy to include bitcoin (or GBTC as proxy for retirement accounts) as another uncorrelated asset class with ‘similar’ high risk/reward profile?
It is interesting (predictable?) that we hear this after bitcoin has gone up by something like 40% since start of this year. That being said, Dr Qians book “risk parity fundamentals” does advocate for holding commodities as a slice. Bitcoin is a currency but I think some see it more along the lines of precious metals. I personally think it’s hot air and would not own it with even 5% of portfolio.

The hope is that during future market crashes there will be a flight to safety (LTTs). I am not sure how bitcoin would help in that scenario, it seems like it’s just be more of a drag on performance in the long term.

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

Post by sicdrag » Mon Apr 15, 2019 8:39 pm

getjiggy wrote:
Sun Apr 14, 2019 9:27 pm
I am new to this forum and unfamiliar with community philosophy but have been an investor for 20+ years including stocks/real estate local and global/options trading etc. As someone always looking to dig into new class of assets or strategies to balance risk vs rewards, I got hooked to this thread’s proposed strategy and allocated some portion. What is the group’s thinking specifically on using say ~5-10% of this strategy to include bitcoin (or GBTC as proxy for retirement accounts) as another uncorrelated asset class with ‘similar’ high risk/reward profile?
I'd say there are two major issues with bitcoin. First of all, it is (probably) not uncorrelated or a reliable flight to safety asset in an equity crash. Second, merely being high risk high reward is not sufficient for it to make a good investment. You need it to actually be a positive expected value asset which is far from clear. The reason this strategy may work is that obviously US equities are a +EV asset, so therefore leveraging them is even more +EV.

That said, there is at least some argument for allocating to gold/bitcoin in this portfolio with some %, in the event that inflation explodes or the dollar loses reserve currency status, there is a chance that such an allocation would protect you. It depends on 1) how likely you think such an event is, 2) whether you think bitcoin is likely to be an effective hedge. I think if you do allocate to bitcoin, 5-10% is far too much. 1% to bitcoin and some to gold might be reasonable if you are actively worried about inflation/USD.

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

Post by getjiggy » Mon Apr 15, 2019 11:50 pm

sicdrag wrote:
Mon Apr 15, 2019 8:39 pm
getjiggy wrote:
Sun Apr 14, 2019 9:27 pm
I am new to this forum and unfamiliar with community philosophy but have been an investor for 20+ years including stocks/real estate local and global/options trading etc. As someone always looking to dig into new class of assets or strategies to balance risk vs rewards, I got hooked to this thread’s proposed strategy and allocated some portion. What is the group’s thinking specifically on using say ~5-10% of this strategy to include bitcoin (or GBTC as proxy for retirement accounts) as another uncorrelated asset class with ‘similar’ high risk/reward profile?
I'd say there are two major issues with bitcoin. First of all, it is (probably) not uncorrelated or a reliable flight to safety asset in an equity crash. Second, merely being high risk high reward is not sufficient for it to make a good investment. You need it to actually be a positive expected value asset which is far from clear. The reason this strategy may work is that obviously US equities are a +EV asset, so therefore leveraging them is even more +EV.

That said, there is at least some argument for allocating to gold/bitcoin in this portfolio with some %, in the event that inflation explodes or the dollar loses reserve currency status, there is a chance that such an allocation would protect you. It depends on 1) how likely you think such an event is, 2) whether you think bitcoin is likely to be an effective hedge. I think if you do allocate to bitcoin, 5-10% is far too much. 1% to bitcoin and some to gold might be reasonable if you are actively worried about inflation/USD.
The most unfavorable scenario for this strategy (60% Tmf and 40% upro) is when equity crashes and inflation is high negatively impacting the long treasury as well. In such scenario of high inflation, BTC’s apparent use case holds suggesting flight to crypto during high inflation period (Venezuela, Africa etc). Hence the ask above. Also, allocation is 5-10% within this strategy (eg TMF -57%, UPRO -37%, GBTC OR BTC - 6%). Also, I am old school but have been very keenly following crypto evolution as new asset class given several tech thought leaders throwing their weight behind it for long term. And was incorrectly expecting mass following here in Bogleheads with relatively younger gen participants☺️

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

Post by DonIce » Tue Apr 16, 2019 12:35 am

getjiggy wrote:
Mon Apr 15, 2019 11:50 pm
The most unfavorable scenario for this strategy (60% Tmf and 40% upro) is when equity crashes and inflation is high negatively impacting the long treasury as well. In such scenario of high inflation, BTC’s apparent use case holds suggesting flight to crypto during high inflation period (Venezuela, Africa etc). Hence the ask above. Also, allocation is 5-10% within this strategy (eg TMF -57%, UPRO -37%, GBTC OR BTC - 6%). Also, I am old school but have been very keenly following crypto evolution as new asset class given several tech thought leaders throwing their weight behind it for long term. And was incorrectly expecting mass following here in Bogleheads with relatively younger gen participants☺️
The Venezuela/Africa scenario is pretty different. Those countries are on the periphery of the global economy. Economic collapse in those countries, while very painful for the inhabitants, has relatively little impact on the global system. And, the top echelons of people from those countries can use the internet to access well-functioning markets in other countries, including BTC. In contrast, a scenario of high inflation and economic collapse in the developed world may well bring along with it collapse or impairment of internet infrastructure, which will eliminate most people's ability to access or use their bitcoin. In 2008/9, major financial firms that no one thought could fail went bankrupt. In the future, if companies like Cisco, Google, Amazon, and Microsoft were to fail, global networks would be in shambles and may take years to restore, and old data and websites may never be recovered. There are no "too big to fail" rules on tech companies. Even without these major companies failing, vast amounts of bitcoin have already been lost as the result of the failures of much smaller entities (exchanges, wallets, etc).

Therefore bitcoin hedges against only a very narrow set of risk... high inflation and economic crash, but not so severe as to disrupt technological infrastructure. Furthermore, the history of bitcoin is short, and there is little evidence that its ability to hold value is anything but a fad. Fundamentally, a new cryptocurrency can be created at any time, and if it offers a more attractive system for more users, it could quickly supplant existing cryptocurrencies. In contrast, gold hedges the full gamut of risk from just vanilla high inflation, to hyperinflation, to "apocalypse", and there is a long history suggesting that it holds its value through all manner of societal and economic upheaval. There are plenty of advocates for gold on this forum, including for holding physical gold.

Bitcoin in particular offers very little attractiveness for mass adoption, because the overwhelming majority of bitcoin has already been mined, and resides in the hands of a tiny minority of individuals who got in early. Late adopters, by design, are at a massive disadvantage, and given that any one cryptocurrency is as good as any other since they are all backed ONLY by supply and demand, why would the masses demand into a system where they start at a massive disadvantage as opposed to one where they don't?

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

Post by typical.investor » Tue Apr 16, 2019 4:09 am

getjiggy wrote:
Mon Apr 15, 2019 11:50 pm
In such scenario of high inflation, BTC’s apparent use case holds suggesting flight to crypto during high inflation period (Venezuela, Africa etc).
Yeah, possibly.

In terms of inflation though, I am unconvinced.

Jan 1 - April 1, bitcoin fees jumped what 500%. I don't see anything limiting that. Certainly a cap on the number of coins doesn't.

It will always take a mining pool to secure the network, and that pool will always have costs. Alt coins, which are dangerous due to the possibility of one entity controlling the pool, are starting to use bitcoin to secure their transactions as it is practically impossible for anyone but a nation-state to obtain control over bitcoin. The alt coins can use bitcoins blockchain to embed their own transaction data because they are paying for it and that is all it takes

The effect on bitcoin though has been increased transactions costs.

So, in effect, are bitcoins really that scarce if as we are starting to see the alt coins can tap into it to make themselves viable and drive up the transaction costs of bitcoins.

I just don't see the scarcity argument as being anything but hype and speculation. If bitcoins and altcoins are cheaper, more convenient, and more secure than other systems of payment, I think they have value and will supplant other systems. If not, they won't.

Anyway, picture the '70s. Wouldn't bitcoin transaction costs have absolutely skyrocketed due to the energy costs borne by miners. I think they would have, and that in such an environment inflation ravaged consumers would gravitate towards the cheapest payment system. I honestly don't see why bitcoins would have been an inflation hedge in such an environment.

More likely in the '70s we'd have seen bitcoin miners abandon it if it wasn't profitable, and Congress stepping in and saying we need to maintain the integrity of the system for economic reasons. In other words argue that the cost of supporting the miners is less than the economic risk of having the blockchain be abandoned. (Assuming it’d reached significance by that point)
Last edited by typical.investor on Tue Apr 16, 2019 7:54 am, edited 2 times in total.

jaj2276
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by jaj2276 » Tue Apr 16, 2019 7:19 am

Regarding the bitcoin argument, I feel the same holds true for bitcoin as it does for gold. If it does save the portfolio you'll need a lot of it. And if it's never needed then a lot of it will likely kill the long-term performance of the strategy.

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

Post by mffl » Tue Apr 16, 2019 8:45 am

In addition to the above arguments against Bitcoin, there is a lot of evidence that its price and changes thereof are nearly completely due to manipulation by bots and scammers. If you aren't one of the lucky few to hold enough Bitcoin and computing power to be manipulating its price, then you're the mark.

Bitcoin is a live experiment in exactly why we have things like banks and financial regulations, everything the Bitcoin community hates. Some of the altcoins and exchanges are trying to solve this by slowly reintroducing things like voting, borrowing, interest, regulatory bodies, etc. It's like they're relearning all the financial lessons of the last 1000 years after starting from scratch, and basing themselves on a security model of "let's waste so much electricity that nobody can take over the system unless they waste more electricity than us". It's really quite ridiculous.

Lots of carnage was left in the wreckage from the last time we all learned these lessons. Don't be a victim from the inexplicable second time some people have subjected themselves to.

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

Post by Kevin M » Tue Apr 16, 2019 4:34 pm

Seems to me that discussions about Bitcoin are way off topic. Can we please stick to discussing the OP's strategy?
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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

Post by Mouro_Emprestado » Tue Apr 16, 2019 5:19 pm

For those wanting to apply a similar strategy in Europe, I have estimated an "albeit-similar" portfolio for us the Europeans.

Some caveats:
- There is currently no x3 leveraged ETF for stocks, nor for treasuries, in Europe that I could found
- There is no leveraged MSCI World ETF, therefore I had to consider 50-50 mix of Stoxx 50 and MSCI USA (in EUR amounts obviously). Since the ETFs are not as old, I considered the monthly amounts for the Index and not of the ETFs
- The same applies to the long term leverage ETF, in this case related to German Bunds, whose ETF and Index (SGI Bund-Future index) only goes back to 2011 and the prior results were back-estimated by the index provider

I have uploaded the information for Portfolio Visualizer and compared the following 3 portfolios (in EUR amounts):

- Leveraged portfolio, considering a 50-50 mix of Stoxx 50 and MSCI USA
- Leveraged portfolio, allocating the 100% of stocks to MSCI USA
- Unleveraged porfolio, based on an European Version of Harry Browne's Permanent Portfolio

In the following link there is the PDF report issued by Portfolio Visualizer: https://ufile.io/3tbf1763

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

Post by reformed.trader » Tue Apr 16, 2019 9:29 pm

After looking at this I decided to join. The only problems I had with this was the vol drag(which I am working around as seen below) and I am under the impression that yields can only go higher from here and that US stock market is extremely expensive. I am dealing with the second problem by adjusting some other holdings.

As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow. Results are below. I got similar results on Quantopian, though it wasn't clean cut(I think their slippage model messes it up). Now this is from the start of these products, which happened to be near the bottom of the market 10 years ago, so there is no way one should expect similar results going forward, but I do expect them to be better than long UPRO/TMF. As of now, borrow rates are low(low single digits).

@ 100% equity (very risky, would require access to margin, thus interest charges, very frequently)

Image


@ 75% equity (Less risky, would require margin while draw downs are ~12.5% or greater)

Image


For a comparison of long UPRO(33%)/TMF(67%) from the same time period...

Image

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

Post by getjiggy » Tue Apr 16, 2019 10:53 pm

Kevin M wrote:
Tue Apr 16, 2019 4:34 pm
Seems to me that discussions about Bitcoin are way off topic. Can we please stick to discussing the OP's strategy?
Apologies, my bad 🤗. thanks all for indulging as each of these perspectives though differing adds clarity. Loud and clear on where this community stands with crypto😀

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

Post by Ayther » Tue Apr 16, 2019 11:32 pm

I've been interested in this strategy for a couple of years now and have implemented it myself with the limited funds I have (college student). Have you run this back to 1926? It's possible to do with Shiller stock market return data (don't include dividends) and Damodaran 10 year treasury return data.

I threw a spreadsheet together and while it's not perfectly accurate it gets the job done and approximates portfolio visualizer returns since 1970.

The 1926-2019 performance is great cumulatively. But the strategy basically tracks the market for the first 40 years or so and pulls ahead in the 1960's.

Does anyone have an explanation for this? Seems slightly concerning.


EDIT:
Actually, if anyone's interested (you should be but I doubt this post will get any traction, I guess I'm posting for posterity), it's because bond yields were very low during the 1926-1960 period and then rose after. Since 70+% of bond returns are due to the yield, this caused low portfolio returns.

It actually turns out fine if you lever the bond portion 6x during the 40 year low rate period (could probably go higher). This doesn't expose you to much more risk because there isn't a lot of room for yields to fall so the price of the bond can't change that much even if yields go against you.
Last edited by Ayther on Wed Apr 17, 2019 12:27 am, edited 1 time in total.

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

Post by DonIce » Wed Apr 17, 2019 12:23 am

reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow. Results are below. I got similar results on Quantopian, though it wasn't clean cut(I think their slippage model messes it up). Now this is from the start of these products, which happened to be near the bottom of the market 10 years ago, so there is no way one should expect similar results going forward, but I do expect them to be better than long UPRO/TMF. As of now, borrow rates are low(low single digits).
What broker gives you low single digits borrow rates to short SPXU and TMV? I haven't seen any triple leveraged inverse ETFs be easy to short, occasionally can find some 2x leveraged ones. Shorting triple leveraged inverse ETFs if you can get it at low borrow rates seems like free money.

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

Post by reformed.trader » Wed Apr 17, 2019 9:22 am

DonIce wrote:
Wed Apr 17, 2019 12:23 am
reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow. Results are below. I got similar results on Quantopian, though it wasn't clean cut(I think their slippage model messes it up). Now this is from the start of these products, which happened to be near the bottom of the market 10 years ago, so there is no way one should expect similar results going forward, but I do expect them to be better than long UPRO/TMF. As of now, borrow rates are low(low single digits).
What broker gives you low single digits borrow rates to short SPXU and TMV? I haven't seen any triple leveraged inverse ETFs be easy to short, occasionally can find some 2x leveraged ones. Shorting triple leveraged inverse ETFs if you can get it at low borrow rates seems like free money.
Current estimated rates at etrade at 1% and 2% for SPXU and TMV.

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

Post by DonIce » Wed Apr 17, 2019 9:26 am

reformed.trader wrote:
Wed Apr 17, 2019 9:22 am
Current estimated rates at etrade at 1% and 2% for SPXU and TMV.
Where can you see the estimated borrow rate? When I preview an order to short SPXU at etrade, it just tells me its "hard to borrow" (which usually implies rates in the double digit percents).

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

Post by targetconfusion » Wed Apr 17, 2019 9:38 am

reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow.
This may be a stupid question, but what's the advantage of shorting short over going long? Is it simply a cheaper way to get more leverage?

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

Post by reformed.trader » Wed Apr 17, 2019 9:45 am

DonIce wrote:
Wed Apr 17, 2019 9:26 am
reformed.trader wrote:
Wed Apr 17, 2019 9:22 am
Current estimated rates at etrade at 1% and 2% for SPXU and TMV.
Where can you see the estimated borrow rate? When I preview an order to short SPXU at etrade, it just tells me its "hard to borrow" (which usually implies rates in the double digit percents).
I see it on the preview page right before you submit the order. TMV is 1% right now.

Image

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

Post by DonIce » Wed Apr 17, 2019 9:49 am

reformed.trader wrote:
Wed Apr 17, 2019 9:45 am
I see it on the preview page right before you submit the order. TMV is 1% right now.

Image
Ah, thanks! I was looking inside the power etrade platform not the basic interface. Funny that

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

Post by reformed.trader » Wed Apr 17, 2019 9:56 am

targetconfusion wrote:
Wed Apr 17, 2019 9:38 am
reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow.
This may be a stupid question, but what's the advantage of shorting short over going long? Is it simply a cheaper way to get more leverage?
Vol drag works for you rather than against you. But it requires margin.

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

Post by typical.investor » Wed Apr 17, 2019 11:17 am

reformed.trader wrote:
Wed Apr 17, 2019 9:56 am
targetconfusion wrote:
Wed Apr 17, 2019 9:38 am
reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow.
This may be a stupid question, but what's the advantage of shorting short over going long? Is it simply a cheaper way to get more leverage?
Vol drag works for you rather than against you. But it requires margin.
Practically speaking, how easily/reliably can you short sell an inverse 3x fund in a strong market.

Who would want to continue holding such a fund for you to borrow?

I suspect you’d have to watch and repeatedly replace your short as lenders sell out.

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

Post by reformed.trader » Wed Apr 17, 2019 1:12 pm

typical.investor wrote:
Wed Apr 17, 2019 11:17 am
reformed.trader wrote:
Wed Apr 17, 2019 9:56 am
targetconfusion wrote:
Wed Apr 17, 2019 9:38 am
reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow.
This may be a stupid question, but what's the advantage of shorting short over going long? Is it simply a cheaper way to get more leverage?
Vol drag works for you rather than against you. But it requires margin.
Practically speaking, how easily/reliably can you short sell an inverse 3x fund in a strong market.

Who would want to continue holding such a fund for you to borrow?

I suspect you’d have to watch and repeatedly replace your short as lenders sell out.
You don't borrow from one individual, but a pool.

I have held the long vol products short for long periods of time with no issue and those decay much faster than the 3x bear fund and they are also harder to borrow.

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

Post by celerity » Wed Apr 17, 2019 5:53 pm

Mouro_Emprestado wrote:
Tue Apr 16, 2019 5:19 pm
For those wanting to apply a similar strategy in Europe, I have estimated an "albeit-similar" portfolio for us the Europeans.

Some caveats:
- There is currently no x3 leveraged ETF for stocks, nor for treasuries, in Europe that I could found
- There is no leveraged MSCI World ETF, therefore I had to consider 50-50 mix of Stoxx 50 and MSCI USA (in EUR amounts obviously). Since the ETFs are not as old, I considered the monthly amounts for the Index and not of the ETFs
- The same applies to the long term leverage ETF, in this case related to German Bunds, whose ETF and Index (SGI Bund-Future index) only goes back to 2011 and the prior results were back-estimated by the index provider

I have uploaded the information for Portfolio Visualizer and compared the following 3 portfolios (in EUR amounts):

- Leveraged portfolio, considering a 50-50 mix of Stoxx 50 and MSCI USA
- Leveraged portfolio, allocating the 100% of stocks to MSCI USA
- Unleveraged porfolio, based on an European Version of Harry Browne's Permanent Portfolio

In the following link there is the PDF report issued by Portfolio Visualizer: https://ufile.io/3tbf1763
That's not a risk parity portfolio. Risk parity for Euro Stoxx 50 2x (or MSCI USA) and SGI Daily Leverage Bund is ~25/75, not 40/60.
EDIT: Nevermind, my bad.

I think it's a mistake to use monthly data on daily levered ETFs. The result may be inaccurate.

I'm currently working on my own backtest on these indexes (as well as MSCI Emerging Markets). However, I'm unable to find any daily data for longer periods than 5 years. If you happen to know, please PM me.

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

Post by Mouro_Emprestado » Thu Apr 18, 2019 9:59 am

celerity wrote:
Wed Apr 17, 2019 5:53 pm
EDIT: Nevermind, my bad.

I think it's a mistake to use monthly data on daily levered ETFs. The result may be inaccurate.

I'm currently working on my own backtest on these indexes (as well as MSCI Emerging Markets). However, I'm unable to find any daily data for longer periods than 5 years. If you happen to know, please PM me.
I actually found daily data, but I have not been able to upload the daily data under the same subsets, that's why I used the montly data. :oops: :oops: :oops:

In any case, I ran a far more detailed experiment with actual ETFs on the JustETF.com and the data seems very similar.

Let me analyze again the information I was able to download and maybe we can improve the analysis for the Europeans.

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

Post by targetconfusion » Thu Apr 18, 2019 11:12 pm

reformed.trader wrote:
Wed Apr 17, 2019 9:56 am
targetconfusion wrote:
Wed Apr 17, 2019 9:38 am
reformed.trader wrote:
Tue Apr 16, 2019 9:29 pm
As for vol drag, I have decided to short SPXU and TMV rather than going long UPRO and TMF. This is a bit more advanced than simply going long, so I am not recommending anyone follow.
This may be a stupid question, but what's the advantage of shorting short over going long? Is it simply a cheaper way to get more leverage?
Vol drag works for you rather than against you. But it requires margin.
You are, without a doubt, far savvier in these matters and so this is with a pile of humility, but doesn't that seem a little too easy? Although short-the-short wasn't obvious to me, a little searching reveals it's not even close to a new idea and, presumably, any possible free lunch from something so simple would be eaten long before the retail folks got there. No? If what you're saying is true, is anyone long (directly) just an idiot?

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

Post by DonIce » Thu Apr 18, 2019 11:48 pm

targetconfusion wrote:
Thu Apr 18, 2019 11:12 pm
You are, without a doubt, far savvier in these matters and so this is with a pile of humility, but doesn't that seem a little too easy? Although short-the-short wasn't obvious to me, a little searching reveals it's not even close to a new idea and, presumably, any possible free lunch from something so simple would be eaten long before the retail folks got there. No? If what you're saying is true, is anyone long (directly) just an idiot?
Shorting the short carries additional risk and cost.

First, a short position that moves against you can cause you to lose an unlimited amount of money (you can end up owing more than your original position size), whereas with going long, your losses are capped at the amount of your original investment. Second, a short position must be "rebalanced" actively quite frequently to be close to tracking the return of going long the opposite instrument, this introduces additional behavioral risks. Third, doing this periodic (~monthly) re-shorting carries additional trading costs. Fourth, short sale proceeds are always taxed as short term capital gains, whereas long positions may receive favorable tax treatment. Fifth, short positions may not be taken in tax-advantaged retirement accounts, meaning they are always subject to these high taxes. Sixth, there is a widespread aversion to shorting, just as there is a widespread aversion to leverage. Seventh, and perhaps most significantly, shares borrowed for a short sale may at any time become classified as "hard to borrow" by your broker and the interest rate you get charged for holding the short position may increase without warning to 50-100% per year or even more, forcing you to abandon your position and your strategy.

If one believes the risk premium theory of returns, all of these risks and behavioral factors should contribute to making it so that going long by shorting the short should carry an additional risk premium compared to going long directly.

All that being said, here is what one would get by shorting SPXS as compared to going long SPXL:

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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

Post by dave_k » Fri Apr 19, 2019 12:14 am

DonIce wrote:
Thu Apr 18, 2019 11:48 pm
All that being said, here is what one would get by shorting SPXS as compared to going long SPXL:

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Very interesting. I assume that doesn't take into account the costs of re-shorting, the tracking error you mentioned, or the borrowing costs, not to mention the tax drag. Do we have a way of simulating that?

Added: You mentioned that you'd have to abandon the strategy if it became "hard to borrow", but at those times couldn't you switch to the 3x long version, then back once it no longer was? It may not perform quite as well, but it seems like a better alternative than abandoning it. Is it likely that it would become hard to borrow when the outperformance would be highest, negating a lot of the benefit?

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

Post by DonIce » Fri Apr 19, 2019 12:24 am

dave_k wrote:
Fri Apr 19, 2019 12:14 am
DonIce wrote:
Thu Apr 18, 2019 11:48 pm
All that being said, here is what one would get by shorting SPXS as compared to going long SPXL:

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Very interesting. I assume that doesn't take into account the costs of re-shorting, the tracking error you mentioned, or the borrowing costs, not to mention the tax drag. Do we have a way of simulating that?
It does capture the "tracking error". Re-set the linked simulation to rebalance annually or to not rebalance and watch the difference. But yes, it doesn't capture any of the rest.

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

Post by DonIce » Fri Apr 19, 2019 12:27 am

dave_k wrote:
Fri Apr 19, 2019 12:14 am
Added: You mentioned that you'd have to abandon the strategy if it became "hard to borrow", but at those times couldn't you switch to the 3x long version, then back once it no longer was? It may not perform quite as well, but it seems like a better alternative than abandoning it. Is it likely that it would become hard to borrow when the outperformance would be highest, negating a lot of the benefit?
I don't have enough experience actually shorting stuff to answer this one. There is probably a lot of potential exposure to loss going between the -3x short to the +3x long as a response to hard to borrow status. For one, I don't even know if brokers automatically notify you if your shares become hard to borrow so you probably have to check daily. Perhaps someone who does more shorting can chime in?

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

Post by siamond » Fri Apr 19, 2019 4:24 am

celerity wrote:
Wed Apr 17, 2019 5:53 pm
Mouro_Emprestado wrote:
Tue Apr 16, 2019 5:19 pm
For those wanting to apply a similar strategy in Europe, I have estimated an "albeit-similar" portfolio for us the Europeans.

Some caveats:
- There is currently no x3 leveraged ETF for stocks, nor for treasuries, in Europe that I could found
- There is no leveraged MSCI World ETF, therefore I had to consider 50-50 mix of Stoxx 50 and MSCI USA (in EUR amounts obviously). Since the ETFs are not as old, I considered the monthly amounts for the Index and not of the ETFs [...]
I think it's a mistake to use monthly data on daily levered ETFs. The result may be inaccurate.

I'm currently working on my own backtest on these indexes (as well as MSCI Emerging Markets). However, I'm unable to find any daily data for longer periods than 5 years. If you happen to know, please PM me.
Yes, you need intra-month daily volatility to do any proper modeling of leveraged funds, as was explained in this thread. Having daily (total) returns is obviously the easiest way to get to that.

SPDR® EURO STOXX 50 ETF has daily data back to Nov-02. iShares STOXX Europe 50 ETF EUR Dist has daily data back to Apr-2000 and iShares EURO STOXX 50 (DE) goes back to Jan-01. The index itself was introduced in Feb-98. More generally, historical daily data is really hard to find when it comes to non-US asset classes. MSCI, as a case in point, doesn't provide daily data in its indices (incl. MSCI EM) until Jan-2001.

PS. don't know if that was already discussed, but here is a 3x leveraged ETF tracking the Stoxx 50 (in Euros): WisdomTree EU3L.

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

Post by reformed.trader » Fri Apr 19, 2019 7:21 am

DonIce wrote:
Fri Apr 19, 2019 12:27 am
dave_k wrote:
Fri Apr 19, 2019 12:14 am
Added: You mentioned that you'd have to abandon the strategy if it became "hard to borrow", but at those times couldn't you switch to the 3x long version, then back once it no longer was? It may not perform quite as well, but it seems like a better alternative than abandoning it. Is it likely that it would become hard to borrow when the outperformance would be highest, negating a lot of the benefit?
I don't have enough experience actually shorting stuff to answer this one. There is probably a lot of potential exposure to loss going between the -3x short to the +3x long as a response to hard to borrow status. For one, I don't even know if brokers automatically notify you if your shares become hard to borrow so you probably have to check daily. Perhaps someone who does more shorting can chime in?
It matters the broker. I have had forced buy ins before where I was not notified and my position was simply closed.

There are enough 3x short ETFs out there that are extremely correlated to 3x S&P that you should always be able to find something to borrow. But tax/transaction costs will obviously be an issue.

Why everyone doesn't do it is probably due to the inherent risks in shorting. If the S&P were to drop 50% in a short period, the 3x short will lose MORE than 150% more than likely(due to compounded returns). You also have to pay to borrow and pay for margin(if require). Its a lot more complicated and risky, but could be much more profitable if managed properly.

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

Post by targetconfusion » Fri Apr 19, 2019 11:21 am

reformed.trader wrote:
Fri Apr 19, 2019 7:21 am
Why everyone doesn't do it is probably due to the inherent risks in shorting. If the S&P were to drop 50% in a short period, the 3x short will lose MORE than 150% more than likely(due to compounded returns). You also have to pay to borrow and pay for margin(if require). Its a lot more complicated and risky, but could be much more profitable if managed properly.
I'm missing something for sure. It seems like the worst the underlying index could become is worthless. There, the inverse ETF gains 300%? (I realize it could be more if it does it over several days, but in that case folks are like bailing on the position). So then a short of the inverse ETF falls a lot, by whatever multiple of 300% you're levered? But to my naive understanding the theoretical downside still seems bounded. Stepping back, this worst-case scenario is not only bounded but unlikely enough that it seems like too small a risk price to pay to fully explain the substantial CAGR advantage DonIce’s portfolio visualizer example portrays.

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

Post by targetconfusion » Fri Apr 19, 2019 11:22 am

Thanks, DonIce, for the detailed and earnest reply. I have a few counterquestions, which I always find myself needing to ask to hone my understanding of investment nuances. (hopefully there are other noobs of my ilk benefitting and I’m not wantonly squandering forum space).
DonIce wrote:
Thu Apr 18, 2019 11:48 pm
First, a short position that moves against you can cause you to lose an unlimited amount of money (you can end up owing more than your original position size), whereas with going long, your losses are capped at the amount of your original investment.
Yes, but if you’re short^2 are you not back to being loss-capped like a long? See above reasoning in response to reformed.trader.
DonIce wrote:
Thu Apr 18, 2019 11:48 pm
Second, a short position must be "rebalanced" actively quite frequently to be close to tracking the return of going long the opposite instrument, this introduces additional behavioral risks.
Fourth, short sale proceeds are always taxed as short term capital gains, whereas long positions may receive favorable tax treatment.
Fifth, short positions may not be taken in tax-advantaged retirement accounts, meaning they are always subject to these high taxes.
Sixth, there is a widespread aversion to shorting, just as there is a widespread aversion to leverage.
These seem like genuine problems for us retail investors but not for pros, whose collective volume (is it fair to assume?) is driving price (and therefore alpha) anyway.
DonIce wrote:
Thu Apr 18, 2019 11:48 pm
Third, doing this periodic (~monthly) re-shorting carries additional trading costs.
Seventh, and perhaps most significantly, shares borrowed for a short sale may at any time become classified as "hard to borrow" by your broker and the interest rate you get charged for holding the short position may increase without warning to 50-100% per year or even more, forcing you to abandon your position and your strategy.
Transaction cost and liquidity issues – these make sense. Still, reformed.trader and others must have done some analysis that concludes these are more than offset by the alpha short^2 brings. If so, I’m drifting back to my starting point of “are we stupid to ever be long instead of short^2?”

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