Understanding using treasury futures for leverage to implement risk parity

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TheJoelfather
Posts: 26
Joined: Wed Apr 17, 2019 9:49 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by TheJoelfather » Wed Apr 17, 2019 10:07 am

aristotelian wrote:
Tue Apr 16, 2019 6:13 am
klaus14 wrote:
Mon Feb 25, 2019 6:55 pm
There is an ETF that does it for you: NTSX
expense ratio is reasonable: 0.20%
I am replacing my US Large allocation with this to achieve better risk parity.
+1. I have not bought any yet but I am looking to open a position soon. I like the idea of this fund to use leverage on the bond side to achieve near 100% of SP500 with less volatility. This ETF seems like a good instrument to achieve OPs result.

I have wondered why it is necessary to own stocks and bonds when you could just own a contract to return the market price. Use leverage to get the risk level that you want. Is there some reason why I need to actually own the securities I am betting on?
Inspired by the comments here and the introduction to NTSX, I modeled what a portfolio allocation would need to maintain all-weather exposures but using the faux leverage of NTSX.

Image

Allocation:
  • NTSX (Mixed Assets): 40%
  • FBGX (LT Treasuries): 42%
  • FUAMX (IT Treasuries): 0%
  • GLDM (Gold): 9%
  • BCI (Commodities): 9% **

The allocation provides the all-weather economic exposure at a 1.2 faux-leverage ratio.

** Depending on your commodity fund, you may have to increase your allocation to your commodity fund and reduce allocation to your gold fund because your commodity fund likely holds gold. I ignored the ex-Gold calculation here.

Edit: Added graphic.

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

Re: Understanding using treasury futures for leverage to implement risk parity

Post by EfficientInvestor » Tue May 07, 2019 10:58 am

DonIce wrote:
Wed Mar 13, 2019 6:30 pm
HEDGEFUNDIE wrote:
Wed Mar 13, 2019 6:17 pm
Interesting. I didn’t know they allowed equities as collateral.

Let us know how the daily cash settlement works out for you.
Will do. I probably know less than one ought to know before trading a futures contract but hopefully this education won't be too expensive.
DonIce - Can you provide an update on the effect of daily cash settlements on your strategy? What kind of uninvested cash are you needing to keep on the sidelines to cover collateral? My gut feeling is that any cash drag caused by uninvested funds is still not as bad as the volatility drag and 1% expense ratios present in the leveraged ETFs. It would nice to be able to compare actual numbers though.

Topic Author
DonIce
Posts: 732
Joined: Thu Feb 21, 2019 6:44 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Tue May 07, 2019 11:16 am

EfficientInvestor wrote:
Tue May 07, 2019 10:58 am
DonIce - Can you provide an update on the effect of daily cash settlements on your strategy? What kind of uninvested cash are you needing to keep on the sidelines to cover collateral? My gut feeling is that any cash drag caused by uninvested funds is still not as bad as the volatility drag and 1% expense ratios present in the leveraged ETFs. It would nice to be able to compare actual numbers though.
Using etrade, it created a separate futures account for me, which is linked to my normal margin account where I hold my ETFs. To fund the futures purchase, it moved the required collateral (~$1200) from the margin account to the futures account. Each day, the fluctuations in the /ZN contract change the value of the futures account and at the end of the day, enough money is automatically transferred back and forth to keep the futures account with a ~$1200 balance. If there's not enough cash sitting in the margin account, it just uses margin instead. So the total amount of cash I keep around uninvested is about $2000, enough for the collateral plus a bit of day to day fluctuation. So there's no need to keep a massive amount of uninvested cash around, but if futures were to drop a fair bit I would start getting charged margin interest. But I deposit enough new cash monthly to the account anyway as part of my regular investments that I wouldn't be getting charged margin interest for long.

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Wed May 08, 2019 9:23 pm

Started paper trading @ TDA with 1 Emini and 6 two year treasuries future contracts which approximately 10x leverage (1x stocks vs 9x bonds)

fallingeggs
Posts: 61
Joined: Sat May 04, 2019 7:11 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by fallingeggs » Thu May 09, 2019 8:41 am

DonIce wrote:
Thu Feb 21, 2019 7:58 pm
However, when I look at the historical returns of the 10 year treasury note futures, for example here (data available from 1983):
https://www.investing.com/rates-bonds/u ... rical-data
and compare it to the historical returns of actually holding the 10 year treasury note, for example here:
http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

I get an annual average annual return of about 1.3% for the futures (with a standard deviation of 7.5%), while holding the actual treasuries has an annual average annual return of about 7.4% (with a standard deviation of 9.5%) over the same time period.
Maybe you've figured out an answer to your question based on everyone's responses, but I didn't quite figure it out. I've still struggled to "see" where the yield of the underlying bond comes through on a future. I get everything in concept, but was missing something in the practical implementation.

What I've determined is that the future data that you are looking at (and what I've been looking at) removes the yield with the expressed purpose of focusing the futures price only on the price of the underlying bond (and other future things like embedded options and things I don't understand or think really make a big deal to us over the long term). I suspected this for a while, but haven't been able to put my finger on the cause until now.

I'll try to summarize the article that pointed this out to me, but it's linked below as I'll probably fail...

Non-Earth shattering background:
Future price = Spot - ([present value of the] yield - funding)

The (yield - funding) naturally decreases as time goes on in the bond market because there is less and less interest payments to be received as one gets closer to the delivery date. Therefore, if the underlying price of the bond doesn't change throughout the holding period, one should be able to buy a future for some amount and watch its price naturally increase as you get closer to delivery. (This the the yield we are trying to "see.")

When you roll this contract---still assuming the underlying bond hasn't changed in price---you'll sell the contract for a higher price than what you purchased it for and buy the new contract at that original lower price. There is the yield. It's call backwardation or roll yield (or roll up yield) in the biz.

Why doesn't the data show this?
The data, as mentioned, adjusts (or doesn't adjust, actually a little confused on this point) the opening price of that new contract to equal the closing price of the previous contract; thus, removing the effect of the yield. The data shows you opening a contract at 155 with no price change until you sell it at 155 and open a new contract at 155. But what actually happens is that you buy the contract at 145, and sell at 155 and buy a new contract at 145.

There might be very good reasons why future traders do this, but it isn't helpful for us buy-and-hold types because we care about the total return from rolling the contract. Based on price alone, the data would show an under performance as compared to the total return. The total return of the future should still under perform the bond itself by the funding rate. (This is where you take into account the yield earned on your cash, but for a leveraged portfolio, it will be of minimal help.)

Hopefully other gurus will chime in if this needs adjusting...

https://www.themacrotourist.com/posts/2 ... rn-lesson/

How do you adjust the data to find the total return?
I believe there must be a source for the data we're after, but it might not be available for free. The article uses Bloomberg to make that adjustment. Maybe Quandl does as well, but $20 only gets you the past 5 years of data to play with for a month. If one could find a source for the individual contracts, you could roll everything yourself, which is what Rob Bertam did in his back testing. He said he pulled the individual contracts from Quandl, but I haven't figured out how to do that yet.

Topic Author
DonIce
Posts: 732
Joined: Thu Feb 21, 2019 6:44 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Thu May 09, 2019 2:09 pm

whoever wrote:
Wed May 08, 2019 9:23 pm
Started paper trading @ TDA with 1 Emini and 6 two year treasuries future contracts which approximately 10x leverage (1x stocks vs 9x bonds)
Let us know how it works out!

I also considered using multiple shorter term treasury futures, but one of the reasons I decided to go with the 10 year is the increased trading costs for trading multiple shorter contracts. The fees/commissions are on a per contract basis.

Topic Author
DonIce
Posts: 732
Joined: Thu Feb 21, 2019 6:44 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Thu May 09, 2019 2:12 pm

fallingeggs wrote:
Thu May 09, 2019 8:41 am
Maybe you've figured out an answer to your question based on everyone's responses, but I didn't quite figure it out. I've still struggled to "see" where the yield of the underlying bond comes through on a future. I get everything in concept, but was missing something in the practical implementation.
Yeah it took me a while to understand too but I think I did figure it out with everyone's help.
Why doesn't the data show this?
The data, as mentioned, adjusts (or doesn't adjust, actually a little confused on this point) the opening price of that new contract to equal the closing price of the previous contract; thus, removing the effect of the yield. The data shows you opening a contract at 155 with no price change until you sell it at 155 and open a new contract at 155. But what actually happens is that you buy the contract at 145, and sell at 155 and buy a new contract at 145.

There might be very good reasons why future traders do this, but it isn't helpful for us buy-and-hold types because we care about the total return from rolling the contract. Based on price alone, the data would show an under performance as compared to the total return. The total return of the future should still under perform the bond itself by the funding rate. (This is where you take into account the yield earned on your cash, but for a leveraged portfolio, it will be of minimal help.)
About half way down page 1 of this thread I posted a link to an index that tracks the total return of holding a rolling position in treasury futures.

fallingeggs
Posts: 61
Joined: Sat May 04, 2019 7:11 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by fallingeggs » Thu May 09, 2019 3:26 pm

DonIce wrote:
Thu May 09, 2019 2:12 pm
About half way down page 1 of this thread I posted a link to an index that tracks the total return of holding a rolling position in treasury futures.
Thanks! My first pass through the link, I just saw 10 year treasuries, but now I see the 2 year index. Now to figure out how to get more than 10 years worth of data...

fallingeggs
Posts: 61
Joined: Sat May 04, 2019 7:11 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by fallingeggs » Thu May 09, 2019 9:14 pm

fallingeggs wrote:
Thu May 09, 2019 3:26 pm
DonIce wrote:
Thu May 09, 2019 2:12 pm
About half way down page 1 of this thread I posted a link to an index that tracks the total return of holding a rolling position in treasury futures.
Thanks! My first pass through the link, I just saw 10 year treasuries, but now I see the 2 year index. Now to figure out how to get more than 10 years worth of data...
Been giving this a bit more thought tonight (wife's out of town so I have an excess amount of free time...)

The index you linked to is the total return of a full collateralize 10-year future. This isn't very helpful for a leveraged portfolio because you are only partially collateralized and even if you can earn more than whatever the index "invests" the collateral in, it is nearly enough to keep you as if you were fully collateralized. You need an index that doesn't take into account earnings on collateral.

Helpfully, SP has this for 10-year and 30-year futures; although, the data only goes back to around 2016. Comparing the same time periods, 10-year futures were slightly positive at 0.8% on a total return basis, but negative by 0.4% for excess return. 30-year futures were positive by 4% on a total return, but only 2% for excess. (Rates are from memory, but should be in the ballpark.) Too bad they don't have an excess index for 2-year futures, but I'd bet it would be negative for long periods of time since 2016. In other words, the interest yield on the 2-year notes can't overcome the combined financing cost and rising yield. Don't have data to back this up... it's just a guess.

And it's not to say this is bad. The treasury futures are suppose to be a counter to the equities and since 2016, equities have done well. And if the 2-year futures pay off during the next recession when the Fed slams rates back to the floor (and equities drop), you should be happy when you rebalance back into equities. Just wish I had the data to back test this through 2008-2009. Oh well!

(On a side note, I also had the thought that when leveraged to the same volatility, long term treasuries would have a lower financing cost than short terms because you don't have to leverage long terms nearly as much. Perhaps the Sharpe ratio isn't as high with long term treasuries, but not having to deal with a "negative carry" when rates are rising might be a good trade off. Again, just guessing.)

robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by robertmcd » Thu May 09, 2019 11:40 pm

^ this is what the Kessler articles on using treasury futures suggest. Basically during a hiking cycle while the economy is doing well, use long term. But when the long term yields starts to drop while short term rise, you know the short term will follow so move to levered 2 yr position. Basically the Fed policy error being priced in the market. This time around all yields across the curve fell so it was less obvious than prior times, mainly because the Fed reversed course so quickly.

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Fri May 10, 2019 6:59 pm

DonIce wrote:
Thu May 09, 2019 2:09 pm
whoever wrote:
Wed May 08, 2019 9:23 pm
Started paper trading @ TDA with 1 Emini and 6 two year treasuries future contracts which approximately 10x leverage (1x stocks vs 9x bonds)
Let us know how it works out!

I also considered using multiple shorter term treasury futures, but one of the reasons I decided to go with the 10 year is the increased trading costs for trading multiple shorter contracts. The fees/commissions are on a per contract basis.
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?

fallingeggs
Posts: 61
Joined: Sat May 04, 2019 7:11 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by fallingeggs » Mon May 13, 2019 10:39 am

whoever wrote:
Fri May 10, 2019 6:59 pm
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?
You have 140% exposure to the S&P 500, including 140% of its volatility. You've also levered 2 year treasuries to have the volatility of 140% S&P 500. That said, if you rebalance each month or quarter (or based on bands) to keep your target allocation and your target leverage, you shouldn't actually "wipe out."

Honestly, and I hope this doesn't come off as rude, but I'd strongly consider pushing pause on this experiment until you fully understand all of its facets. If you aren't prepared to trade through another 2008-2009 cycle, you might not wipe out, but you'll come close.

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Mon May 13, 2019 12:42 pm

fallingeggs wrote:
Mon May 13, 2019 10:39 am
whoever wrote:
Fri May 10, 2019 6:59 pm
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?
You have 140% exposure to the S&P 500, including 140% of its volatility. You've also levered 2 year treasuries to have the volatility of 140% S&P 500. That said, if you rebalance each month or quarter (or based on bands) to keep your target allocation and your target leverage, you shouldn't actually "wipe out."

Honestly, and I hope this doesn't come off as rude, but I'd strongly consider pushing pause on this experiment until you fully understand all of its facets. If you aren't prepared to trade through another 2008-2009 cycle, you might not wipe out, but you'll come close.
I am paper trading @ TD Ameritrade. I made some changes since then. I am going with 5x leverage with 100k capital.

I am going with 10% US stocks, 5% Treasury bonds and 85% 2 year treasuries

50k VTI (US total stock) ETF
25k ZROZ or EDV ETF
425k 2 year treasury futures (2 futures at current price)

Tried it in PV. Since 1985 CAGR is 13%. Std Dev is 10%, Max drawdown is 21%(in 1994)

https://tinyurl.com/y25l5wua

Again this is strictly paper trading. Any thoughts?

fallingeggs
Posts: 61
Joined: Sat May 04, 2019 7:11 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by fallingeggs » Mon May 13, 2019 1:21 pm

whoever wrote:
Mon May 13, 2019 12:42 pm
I am paper trading @ TD Ameritrade.
👍🏼👍🏼👍🏼
whoever wrote:
Mon May 13, 2019 12:42 pm
Any thoughts?
Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Mon May 13, 2019 2:00 pm

fallingeggs wrote:
Mon May 13, 2019 1:21 pm
whoever wrote:
Mon May 13, 2019 12:42 pm
I am paper trading @ TD Ameritrade.
👍🏼👍🏼👍🏼
whoever wrote:
Mon May 13, 2019 12:42 pm
Any thoughts?
Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.
I am already 100% equities(small cap value) in my Roth. Are you saying 100% equities without leverage and future contracts?

gtwhitegold
Posts: 436
Joined: Fri Sep 21, 2012 1:55 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by gtwhitegold » Mon May 13, 2019 2:28 pm

whoever wrote:
Mon May 13, 2019 12:42 pm
fallingeggs wrote:
Mon May 13, 2019 10:39 am
whoever wrote:
Fri May 10, 2019 6:59 pm
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?
You have 140% exposure to the S&P 500, including 140% of its volatility. You've also levered 2 year treasuries to have the volatility of 140% S&P 500. That said, if you rebalance each month or quarter (or based on bands) to keep your target allocation and your target leverage, you shouldn't actually "wipe out."

Honestly, and I hope this doesn't come off as rude, but I'd strongly consider pushing pause on this experiment until you fully understand all of its facets. If you aren't prepared to trade through another 2008-2009 cycle, you might not wipe out, but you'll come close.
I am paper trading @ TD Ameritrade. I made some changes since then. I am going with 5x leverage with 100k capital.

I am going with 10% US stocks, 5% Treasury bonds and 85% 2 year treasuries

50k VTI (US total stock) ETF
25k ZROZ or EDV ETF
425k 2 year treasury futures (2 futures at current price)

Tried it in PV. Since 1985 CAGR is 13%. Std Dev is 10%, Max drawdown is 21%(in 1994)

https://tinyurl.com/y25l5wua

Again this is strictly paper trading. Any thoughts?
It looks legitimate at first glance. Since you aren't leveraging the equity side, have you considered adding international and/or tilting towards small/value?

MotoTrojan
Posts: 6811
Joined: Wed Feb 01, 2017 8:39 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by MotoTrojan » Mon May 13, 2019 2:42 pm

whoever wrote:
Mon May 13, 2019 2:00 pm
fallingeggs wrote:
Mon May 13, 2019 1:21 pm
whoever wrote:
Mon May 13, 2019 12:42 pm
I am paper trading @ TD Ameritrade.
👍🏼👍🏼👍🏼
whoever wrote:
Mon May 13, 2019 12:42 pm
Any thoughts?
Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.
I am already 100% equities(small cap value) in my Roth. Are you saying 100% equities without leverage and future contracts?
What about outside of your Roth?

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Mon May 13, 2019 3:21 pm

MotoTrojan wrote:
Mon May 13, 2019 2:42 pm
whoever wrote:
Mon May 13, 2019 2:00 pm
fallingeggs wrote:
Mon May 13, 2019 1:21 pm
whoever wrote:
Mon May 13, 2019 12:42 pm
I am paper trading @ TD Ameritrade.
👍🏼👍🏼👍🏼
whoever wrote:
Mon May 13, 2019 12:42 pm
Any thoughts?
Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.
I am already 100% equities(small cap value) in my Roth. Are you saying 100% equities without leverage and future contracts?
What about outside of your Roth?
Mine is 70:30 stocks vs bonds across all accounts (401k, IRa, roth and taxable). 30% is international. In my wifes IRA with is less then 1% of my portfolio I have 3x 40:60 leveraged etfs

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Mon May 13, 2019 3:23 pm

gtwhitegold wrote:
Mon May 13, 2019 2:28 pm
whoever wrote:
Mon May 13, 2019 12:42 pm
fallingeggs wrote:
Mon May 13, 2019 10:39 am
whoever wrote:
Fri May 10, 2019 6:59 pm
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?
You have 140% exposure to the S&P 500, including 140% of its volatility. You've also levered 2 year treasuries to have the volatility of 140% S&P 500. That said, if you rebalance each month or quarter (or based on bands) to keep your target allocation and your target leverage, you shouldn't actually "wipe out."

Honestly, and I hope this doesn't come off as rude, but I'd strongly consider pushing pause on this experiment until you fully understand all of its facets. If you aren't prepared to trade through another 2008-2009 cycle, you might not wipe out, but you'll come close.
I am paper trading @ TD Ameritrade. I made some changes since then. I am going with 5x leverage with 100k capital.

I am going with 10% US stocks, 5% Treasury bonds and 85% 2 year treasuries

50k VTI (US total stock) ETF
25k ZROZ or EDV ETF
425k 2 year treasury futures (2 futures at current price)

Tried it in PV. Since 1985 CAGR is 13%. Std Dev is 10%, Max drawdown is 21%(in 1994)

https://tinyurl.com/y25l5wua

Again this is strictly paper trading. Any thoughts?
It looks legitimate at first glance. Since you aren't leveraging the equity side, have you considered adding international and/or tilting towards small/value?
I did consider adding international. May be VT etf(total world stock) or 70:30 US/International. This is paper trading account so easy to modify :-)

MotoTrojan
Posts: 6811
Joined: Wed Feb 01, 2017 8:39 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by MotoTrojan » Mon May 13, 2019 3:24 pm

whoever wrote:
Mon May 13, 2019 3:21 pm
MotoTrojan wrote:
Mon May 13, 2019 2:42 pm
whoever wrote:
Mon May 13, 2019 2:00 pm
fallingeggs wrote:
Mon May 13, 2019 1:21 pm
whoever wrote:
Mon May 13, 2019 12:42 pm
I am paper trading @ TD Ameritrade.
👍🏼👍🏼👍🏼
whoever wrote:
Mon May 13, 2019 12:42 pm
Any thoughts?
Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.
I am already 100% equities(small cap value) in my Roth. Are you saying 100% equities without leverage and future contracts?
What about outside of your Roth?
Mine is 70:30 stocks vs bonds across all accounts (401k, IRa, roth and taxable). 30% is international. In my wifes IRA with is less then 1% of my portfolio I have 3x 40:60 leveraged etfs
Why pay interest to leverage equities when you can simply boost your allocation to 80:20 for example?

whoever
Posts: 51
Joined: Thu Oct 17, 2013 7:17 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by whoever » Mon May 13, 2019 3:36 pm

MotoTrojan wrote:
Mon May 13, 2019 3:24 pm
whoever wrote:
Mon May 13, 2019 3:21 pm
MotoTrojan wrote:
Mon May 13, 2019 2:42 pm
whoever wrote:
Mon May 13, 2019 2:00 pm
fallingeggs wrote:
Mon May 13, 2019 1:21 pm


👍🏼👍🏼👍🏼



Just that it seems like a lot of effort to start trading futures for just a little increase in reward (if that). No need to over complicate things if you don’t need to... just increase your allocation to equities.
I am already 100% equities(small cap value) in my Roth. Are you saying 100% equities without leverage and future contracts?
What about outside of your Roth?
Mine is 70:30 stocks vs bonds across all accounts (401k, IRa, roth and taxable). 30% is international. In my wifes IRA with is less then 1% of my portfolio I have 3x 40:60 leveraged etfs
Why pay interest to leverage equities when you can simply boost your allocation to 80:20 for example?
If I ever use leverage it will be with futures on bond side. In my paper trading account I am leveraging on bond side. If I ever commit to this experiment it will be seperate from all other accounts.

robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by robertmcd » Thu Jun 20, 2019 9:29 am

Levered 2 yr treasury futures have done insane since the yields hit their highs in the fall of 18. I wish I wasn't a coward. EDV has done great, but the absolute drop in 2-7 yr yields has been astonishing.

TheJoelfather
Posts: 26
Joined: Wed Apr 17, 2019 9:49 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by TheJoelfather » Thu Jun 20, 2019 10:09 am

I've been very pleased incorporating NTSX in my portfolio to achieve the economic exposure of the original Dalio allocation (30%, 40%, 15%, 7.5%, 7.5%). It has behaved exactly as expected -- slow and steady.

While the leverage I get is lower than holding the futures directly, it's a very simple and inexpensive way to get 1:1.2 leverage.

Thank you @Klaus14 to bringing it to my attention. I only hope that it gains traction and increases it's AUM to assure us that it stays with us long-term.

robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by robertmcd » Fri Jun 28, 2019 1:10 pm

What is the best way to get leverage on the yield curve shorter than 2 yrs, eurodollars or fed funds futures I am guessing? What kind of contract volume do you need to be looking for?

Basically the portfolio I am interested in replicating is a 10/90 portfolio of US stocks and 2 yr treasury bonds levered 10x for a 100% stock, 900% 2 yr treasury allocation. But I am wondering how to calculate the amount of leverage necessary to get the volatility of eurodollars/fed funds futures (let's say 6 months out) to match the volatility of 6x short term treasuries, or 1x 20+ yr treasuries.

Also I see a lot of people using TD for futures trading and have heard various explanations on how they are able to maintain/post margin for futures trading there. Is there a way to minimize the amount of cash you are holding in their account since they are not paying you the short term financing rate? Like can I put 100% in VTI, and use that as the collateral for the futures if you are still well under margined due to the extremely low margin requirements for fed funds/eurodollars/treasury futures?

MotoTrojan
Posts: 6811
Joined: Wed Feb 01, 2017 8:39 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by MotoTrojan » Sun Aug 18, 2019 4:59 pm

DonIce wrote:
Tue Feb 26, 2019 7:29 pm
HEDGEFUNDIE wrote:
Tue Feb 26, 2019 7:11 am
DonIce, upon reflection I think one of our previous backtesting methods in the other thread is actually equivalent to continuous futures backtesting.

Let’s say you wanted to lever up a 40/60 portfolio by 3x. In Portfolio Visualizer, going long 120% VFINX, 180% VUSTX, and going short -200% CASHX, should yield the same performance as equivalent notional exposure to futures contracts (and holding that cash in T-bills). Does that make sense?
Interesting! I was trying to backtest this idea on PV but couldn't figure out how to do it since the portfolio had to add up to 100% and I didn't realize you could do a negative allocation to cash. But yes, based on what I've read in this thread and learned in the last few days it seems like that allocation could be created by using futures contracts. I'll be playing with PV more now that you gave me this hint of using a negative cash allocation!

After a few months of reflection, do you feel this is still an appropriate way to backtest rolled futures? It provides a pretty sizable boost compared to using the 3x funds as hedgefundie spearheaded but I am unsure if the futures arrangement has some other drag/costs not accounted for.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by MotoTrojan » Sun Aug 18, 2019 5:07 pm

whoever wrote:
Mon May 13, 2019 12:42 pm
fallingeggs wrote:
Mon May 13, 2019 10:39 am
whoever wrote:
Fri May 10, 2019 6:59 pm
Today at intra days lows my portfolio P/L day was down 1% (insignificant in $ amount) With 14x leverage and larger drawdowns it is very difficult to stick with this strategy. At what point your $100k with 14x leverage will be wiped out?
You have 140% exposure to the S&P 500, including 140% of its volatility. You've also levered 2 year treasuries to have the volatility of 140% S&P 500. That said, if you rebalance each month or quarter (or based on bands) to keep your target allocation and your target leverage, you shouldn't actually "wipe out."

Honestly, and I hope this doesn't come off as rude, but I'd strongly consider pushing pause on this experiment until you fully understand all of its facets. If you aren't prepared to trade through another 2008-2009 cycle, you might not wipe out, but you'll come close.
I am paper trading @ TD Ameritrade. I made some changes since then. I am going with 5x leverage with 100k capital.

I am going with 10% US stocks, 5% Treasury bonds and 85% 2 year treasuries

50k VTI (US total stock) ETF
25k ZROZ or EDV ETF
425k 2 year treasury futures (2 futures at current price)

Tried it in PV. Since 1985 CAGR is 13%. Std Dev is 10%, Max drawdown is 21%(in 1994)

https://tinyurl.com/y25l5wua

Again this is strictly paper trading. Any thoughts?
Rates have been declining since 1985, this seems like a poor plan. You need more equity risk exposure.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by EfficientInvestor » Tue Aug 20, 2019 6:57 am

MotoTrojan wrote:
Sun Aug 18, 2019 4:59 pm
DonIce wrote:
Tue Feb 26, 2019 7:29 pm
HEDGEFUNDIE wrote:
Tue Feb 26, 2019 7:11 am
DonIce, upon reflection I think one of our previous backtesting methods in the other thread is actually equivalent to continuous futures backtesting.

Let’s say you wanted to lever up a 40/60 portfolio by 3x. In Portfolio Visualizer, going long 120% VFINX, 180% VUSTX, and going short -200% CASHX, should yield the same performance as equivalent notional exposure to futures contracts (and holding that cash in T-bills). Does that make sense?
Interesting! I was trying to backtest this idea on PV but couldn't figure out how to do it since the portfolio had to add up to 100% and I didn't realize you could do a negative allocation to cash. But yes, based on what I've read in this thread and learned in the last few days it seems like that allocation could be created by using futures contracts. I'll be playing with PV more now that you gave me this hint of using a negative cash allocation!

After a few months of reflection, do you feel this is still an appropriate way to backtest rolled futures? It provides a pretty sizable boost compared to using the 3x funds as hedgefundie spearheaded but I am unsure if the futures arrangement has some other drag/costs not accounted for.
I have been thinking about this as well and have drawn the conclusion that it is pretty close. To do the analysis, I first pulled the total return data that tracks the S&P 2-Year US Treasury Note Futures Index. The data from the last 10 years is available for free. You can find it at this link:

https://us.spindices.com/indices/fixed- ... turn-index

I then uploaded that data into PortfolioVisualizer and made a ticker symbol for that data set. I then compared it to SHY over the last 10 years. In the image below, the total return data is Portfolio 1 and SHY data is Portfolio 2.

Image

The first thing to keep in mind when viewing these results is that the 2-year futures data represents the total return and is only tracking the price movement of rolling the futures contracts. Therefore, this takes into account whether the futures are rolling rick or cheap, but does not take into account other potential performance drags such as the amount of your capital you will have to set aside in margin. As the results show, the long-term performance is almost identical. However, there are some fluctuations year to year that I attribute to the futures rolling rich or cheap. Take a look at the CME paper at the link below if you need to better understand rich/cheap rolls.
https://www.cmegroup.com/education/file ... ancing.pdf

So the good news is things compare well so far. However, this doesn't represent reality. In reality, you have to set aside a certain amount of your capital as collateral/margin. If you are trying to replicate SHY with futures and not use any leverage, you would fund an account with ~$200k (using this value for round number purposes), put ~$1k in collateral toward the 2-year futures contract, and put the remainder in an instrument that would earn you back the risk-free rate. The futures contract is 100% long the total return of 2-year treasuries and 100% short the risk-free rate (due to cost of carry). However, in this scenario, you would be able to offset ~99.5% of that short position on the risk-free rate by putting the cash not being used as collateral in an ultra-short bond ETF like MINT of JPST. These aren't entirely risk-free, but they also earn a little more than the risk-free rate and make up for the fact that you have to have some of your capital sitting idle in margin.

If you decide to use leverage (which is the whole point of us doing this), some additional inefficiencies creep in because a larger % of your capital is being used as margin. If you only have $25k and are going for an 8X leverage, you now have 4% of your capital used as margin and can only offset 96% ($24k/$25k) of the risk-free rate. However, my current assumption is that I would be able to make up for that inefficiency by keeping my cash in MINT/JPST and earn a bit more than the risk-free rate. Therefore, I am comfortable using SHY as a proxy.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by BTTFutures » Sat Sep 07, 2019 5:09 pm

I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by RandomWord » Mon Sep 09, 2019 1:02 pm

BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image
Can't really help, since I have no idea what the "backwards ratio adjusted open interest switch method" is. But it seems like this sort of thing is going to be highly dependand on the technical details of how they construct the continuous futures, especially if you're going back over a long time range. Bear in mind continuous futures aren't a "real" thing, they're entirely theoretical. The only futures you can actually invest in are tied to a specific month.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by Tyler Aspect » Mon Sep 09, 2019 3:05 pm

Risky Parity Considered Risky

Through some mechanism you can turn a safe treasury instrument into another thing that is as risky as stock. This is a harmful exercise by itself. In responsible investing we are mixing stocks of high but potentially variable returns with safe fixed income instruments to reach a risk profile that is suitable to a target investor. The whole point is to mix risky stuff with safe stuff so that you can come to a point between risky and safe. If bond has been turned as risky as stocks then you can no longer dial down the risk.

Traditionally the most risky portfolio a young investor has in a Target Date styled fund has been set to 90% stock / 10% bond. That is short of 100% stock. Risk parity could further increase risk, turning a responsible portfolio into a non-sustainable speculative portfolio.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by whodidntante » Mon Sep 09, 2019 3:09 pm

Tyler Aspect wrote:
Mon Sep 09, 2019 3:05 pm
Through some mechanism you can turn a safe treasury instrument into another thing that is as risky as stock. This is a harmful exercise by itself. In responsible investing we are mixing stocks of high but potentially variable returns with safe fixed income instruments to reach a risk profile that is suitable to a target investor. The whole point is to mix risky stuff with safe stuff so that you can come to a point between risky and safe. If bond has been turned as risky as stocks then you can no longer dial down the risk.

Traditionally the most risky portfolio a young investor has in a Target Date styled fund has been set to 90% stock / 10% bond. That is short of 100% stock. Risk parity could further increase risk, turning a responsible portfolio into a non-sustainable speculative portfolio.
You keep using that phrase. "Responsible investing." Is it based on your original research?

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by EfficientInvestor » Mon Sep 09, 2019 3:31 pm

Tyler Aspect wrote:
Mon Sep 09, 2019 3:05 pm
Risky Parity Considered Risky

Through some mechanism you can turn a safe treasury instrument into another thing that is as risky as stock. This is a harmful exercise by itself. In responsible investing we are mixing stocks of high but potentially variable returns with safe fixed income instruments to reach a risk profile that is suitable to a target investor. The whole point is to mix risky stuff with safe stuff so that you can come to a point between risky and safe. If bond has been turned as risky as stocks then you can no longer dial down the risk.

Traditionally the most risky portfolio a young investor has in a Target Date styled fund has been set to 90% stock / 10% bond. That is short of 100% stock. Risk parity could further increase risk, turning a responsible portfolio into a non-sustainable speculative portfolio.
Investing along the Capital Market Line is theoretically less risky than a 90/10 portfolio along the efficient frontier (or can provide more return for the same risk). The use of treasuries futures is probably the best way to obtain the leverage necessary to apply this theory. We are not promoting the use of leverage because we are risk-hungry. It is because the literature that promotes the theory is compelling and we want to help each other learn the best ways to implement the theory. I am in my early 30s and I can't ignore this theory. I would otherwise be in the 90/10 camp that you are suggesting. However, as a prudent investor, the application of this theory makes more sense than being 90/10. See this article for a good overview of the "theory" I'm referring to:
https://www.glynholton.com/notes/capital_market_line/

Image
source: https://en.wikipedia.org/wiki/Markowitz ... nd_CML.jpg

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Mon Sep 09, 2019 4:05 pm

whodidntante wrote:
Mon Sep 09, 2019 3:09 pm
Tyler Aspect wrote:
Mon Sep 09, 2019 3:05 pm
Through some mechanism you can turn a safe treasury instrument into another thing that is as risky as stock. This is a harmful exercise by itself. In responsible investing we are mixing stocks of high but potentially variable returns with safe fixed income instruments to reach a risk profile that is suitable to a target investor. The whole point is to mix risky stuff with safe stuff so that you can come to a point between risky and safe. If bond has been turned as risky as stocks then you can no longer dial down the risk.

Traditionally the most risky portfolio a young investor has in a Target Date styled fund has been set to 90% stock / 10% bond. That is short of 100% stock. Risk parity could further increase risk, turning a responsible portfolio into a non-sustainable speculative portfolio.
You keep using that phrase. "Responsible investing." Is it based on your original research?

I get the feeling if he doesn't understand it, it's irresponsible.
Last edited by rascott on Mon Sep 09, 2019 4:13 pm, edited 1 time in total.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Mon Sep 09, 2019 4:11 pm

EfficientInvestor wrote:
Mon Sep 09, 2019 3:31 pm
Tyler Aspect wrote:
Mon Sep 09, 2019 3:05 pm
Risky Parity Considered Risky

Through some mechanism you can turn a safe treasury instrument into another thing that is as risky as stock. This is a harmful exercise by itself. In responsible investing we are mixing stocks of high but potentially variable returns with safe fixed income instruments to reach a risk profile that is suitable to a target investor. The whole point is to mix risky stuff with safe stuff so that you can come to a point between risky and safe. If bond has been turned as risky as stocks then you can no longer dial down the risk.

Traditionally the most risky portfolio a young investor has in a Target Date styled fund has been set to 90% stock / 10% bond. That is short of 100% stock. Risk parity could further increase risk, turning a responsible portfolio into a non-sustainable speculative portfolio.
Investing along the Capital Market Line is theoretically less risky than a 90/10 portfolio along the efficient frontier (or can provide more return for the same risk). The use of treasuries futures is probably the best way to obtain the leverage necessary to apply this theory. We are not promoting the use of leverage because we are risk-hungry. It is because the literature that promotes the theory is compelling and we want to help each other learn the best ways to implement the theory. I am in my early 30s and I can't ignore this theory. I would otherwise be in the 90/10 camp that you are suggesting. However, as a prudent investor, the application of this theory makes more sense than being 90/10. See this article for a good overview of the "theory" I'm referring to:
https://www.glynholton.com/notes/capital_market_line/

Image
source: https://en.wikipedia.org/wiki/Markowitz ... nd_CML.jpg
I applaud your work in this area. Obviously if an investor could create two asset classes that are the same level of risk/return but are uncorrelated (or even better, negatively correlated) .... they are going to be in much better shape investing in both vs just one. It's no different than the justification for investing in intl equities.... only its much, much better than that... since intl equities are relatively highly correlated with US equities.

Let's hope we can all figure out 1) if this works in practice like we think it should, theoretically.... and 2) how do we actually do it.. as it's not a simple undertaking.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by Tyler Aspect » Mon Sep 09, 2019 6:21 pm

Efficient Frontier of Leveraged ETFs Measured in Bull Market cannot be Trusted

In a 2X leveraged ETF if the underlying index had a 50% loss, then the leveraged ETF would have a nearly total loss event. In a 3X leveraged ETF the margin of safety is even less. Just a 33% loss of the underlying index could result in a nearly total loss.

For most of the leveraged ETFs that the investors are interested their history would have shown a smooth sailing market condition, or a bull market. The point of leveraging is that good performance is multiplied, but losses are multiplied as well. Since investors will not consider leveraged ETFs with a rocky performance history, it is already pre-filtered that only leveraged ETFs situated in good market condition will be considered.

If you plot the efficient frontier of a leveraged ETF under consideration, it could tell you a story of the current sunny market condition. It cannot tell you the story of the decent to a nearly total loss event. Anything you calculate is a potential lie.

Similarly the relationships between different indexes can differ significantly during smooth sailing market conditions versus turbulent market conditions. Cross hedging can fail in a situation that you can least afford it. Investment history is littered with hedge funds that failed when the relationships between indexes changed.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Mon Sep 09, 2019 9:13 pm

Tyler Aspect wrote:
Mon Sep 09, 2019 6:21 pm
Efficient Frontier of Leveraged ETFs Measured in Bull Market cannot be Trusted

In a 2X leveraged ETF if the underlying index had a 50% loss, then the leveraged ETF would have a nearly total loss event. In a 3X leveraged ETF the margin of safety is even less. Just a 33% loss of the underlying index could result in a nearly total loss.

For most of the leveraged ETFs that the investors are interested their history would have shown a smooth sailing market condition, or a bull market. The point of leveraging is that good performance is multiplied, but losses are multiplied as well. Since investors will not consider leveraged ETFs with a rocky performance history, it is already pre-filtered that only leveraged ETFs situated in good market condition will be considered.

If you plot the efficient frontier of a leveraged ETF under consideration, it could tell you a story of the current sunny market condition. It cannot tell you the story of the decent to a nearly total loss event. Anything you calculate is a potential lie.

Similarly the relationships between different indexes can differ significantly during smooth sailing market conditions versus turbulent market conditions. Cross hedging can fail in a situation that you can least afford it. Investment history is littered with hedge funds that failed when the relationships between indexes changed.

It's unclear why you are discussing leveraged equity ETFs in a thread about Treasury futures... but putting that point aside, please explain this in reference to your post:

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

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by Tyler Aspect » Tue Sep 10, 2019 12:05 am

rascott wrote:
Mon Sep 09, 2019 9:13 pm
It's unclear why you are discussing leveraged equity ETFs in a thread about Treasury futures... but putting that point aside, please explain this in reference to your post:

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Treasury futures are leveraged. That was why I described the issues with leveraged ETFs.

Your chart of the 2X leveraged S&P 500 ETF (SSO) illustrated my point. That leveraged ETF had an 80% loss during the last recession. A leveraged ETF is typically leveraged at daily performance time frame. That result could differ than a monthly performance time frame or yearly performance time frame. If S&P 500 dropped somewhat more, then SSO could have a 95% loss and a liquidation event in 2009. I doubt a 3X leveraged ETF like UPRO could survive a year 2008 event.

You can also see once the chart included a bear market and its subsequent bull market, the plain variety S&P 500 index had a better Sharpe ratio compared to SSO. If you only include sunny market situation the Sharpe ratio of a leveraged ETF is better than the plain index. The picture changes once you include the catastrophic loss. The efficient frontier of a leveraged ETF during a bull market cannot be trusted.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Tue Sep 10, 2019 7:06 am

Tyler Aspect wrote:
Tue Sep 10, 2019 12:05 am
rascott wrote:
Mon Sep 09, 2019 9:13 pm
It's unclear why you are discussing leveraged equity ETFs in a thread about Treasury futures... but putting that point aside, please explain this in reference to your post:

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Treasury futures are leveraged. That was why I described the issues with leveraged ETFs.

Your chart of the 2X leveraged S&P 500 ETF (SSO) illustrated my point. That leveraged ETF had an 80% loss during the last recession. A leveraged ETF is typically leveraged at daily performance time frame. That result could differ than a monthly performance time frame or yearly performance time frame. If S&P 500 dropped somewhat more, then SSO could have a 95% loss and a liquidation event in 2009. I doubt a 3X leveraged ETF like UPRO could survive a year 2008 event.

You can also see once the chart included a bear market and its subsequent bull market, the plain variety S&P 500 index had a better Sharpe ratio compared to SSO. If you only include sunny market situation the Sharpe ratio of a leveraged ETF is better than the plain index. The picture changes once you include the catastrophic loss. The efficient frontier of a leveraged ETF during a bull market cannot be trusted.

Seems this post would have fit in better on your other thread where you hoped to ban the discussion of LETFs.

Anywho.... hopefully we can return to discussing the operational aspects of the Treasury futures markets now. This is the board for Investing Theory, after all.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by RandomWord » Tue Sep 10, 2019 3:58 pm

BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR).
Did you ever try simulating them with quandl's data on reference futures: https://www.quandl.com/data/SRF-Referen ... d=Treasury ? Seems like that would be a more accurate representation of what really happened. It might be a bit of a pain to code though, since there's so many series that have to be linked together, and the exact results would depend a little on when exactly you roll from one to another.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Thu Sep 12, 2019 12:02 pm

BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image
I'm not sure what the answer is but I have the same concern.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Thu Sep 12, 2019 12:03 pm

RandomWord wrote:
Tue Sep 10, 2019 3:58 pm
Did you ever try simulating them with quandl's data on reference futures: https://www.quandl.com/data/SRF-Referen ... d=Treasury ? Seems like that would be a more accurate representation of what really happened. It might be a bit of a pain to code though, since there's so many series that have to be linked together, and the exact results would depend a little on when exactly you roll from one to another.
Does anyone have these data series available? I could put this together in matlab.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by MotoTrojan » Thu Sep 12, 2019 1:11 pm

Tyler Aspect wrote:
Mon Sep 09, 2019 6:21 pm
Efficient Frontier of Leveraged ETFs Measured in Bull Market cannot be Trusted

In a 2X leveraged ETF if the underlying index had a 50% loss, then the leveraged ETF would have a nearly total loss event. In a 3X leveraged ETF the margin of safety is even less. Just a 33% loss of the underlying index could result in a nearly total loss.

For most of the leveraged ETFs that the investors are interested their history would have shown a smooth sailing market condition, or a bull market. The point of leveraging is that good performance is multiplied, but losses are multiplied as well. Since investors will not consider leveraged ETFs with a rocky performance history, it is already pre-filtered that only leveraged ETFs situated in good market condition will be considered.

If you plot the efficient frontier of a leveraged ETF under consideration, it could tell you a story of the current sunny market condition. It cannot tell you the story of the decent to a nearly total loss event. Anything you calculate is a potential lie.

Similarly the relationships between different indexes can differ significantly during smooth sailing market conditions versus turbulent market conditions. Cross hedging can fail in a situation that you can least afford it. Investment history is littered with hedge funds that failed when the relationships between indexes changed.
Why oh why do you keep saying the same incorrect things? Yes it had an 80% loss. UPRO was 97%, yet many of these strategies overall crushed the S&P500 over many decades, even when including the 60’s/70’s. If you want to talk about the downside risks, fine, but continuing to look only at the equity side in isolation is frankly rude when people are taking the time to attempt to teach you something.

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by RandomWord » Thu Sep 12, 2019 1:19 pm

DonIce wrote:
Thu Sep 12, 2019 12:03 pm
RandomWord wrote:
Tue Sep 10, 2019 3:58 pm
Did you ever try simulating them with quandl's data on reference futures: https://www.quandl.com/data/SRF-Referen ... d=Treasury ? Seems like that would be a more accurate representation of what really happened. It might be a bit of a pain to code though, since there's so many series that have to be linked together, and the exact results would depend a little on when exactly you roll from one to another.
Does anyone have these data series available? I could put this together in matlab.
I think it's all free if you sign up at quandl. Not sure what kind of format it's in. Seems like it would be easier to just use their programming tools (in python).

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Fri Sep 13, 2019 3:49 pm

BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image

I assume you aren't accounting for putting all the excess cash in t bills?

See here

https://www.advisorperspectives.com/art ... res-market

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Re: Understanding using treasury futures for leverage to implement risk parity

Post by BTTFutures » Sat Sep 21, 2019 9:42 am

RandomWord wrote:
Mon Sep 09, 2019 1:02 pm
BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image
Can't really help, since I have no idea what the "backwards ratio adjusted open interest switch method" is. But it seems like this sort of thing is going to be highly dependand on the technical details of how they construct the continuous futures, especially if you're going back over a long time range. Bear in mind continuous futures aren't a "real" thing, they're entirely theoretical. The only futures you can actually invest in are tied to a specific month.
Here is the method explanation. Please reference the link I provided for more info. I used the percent change for my input into PV.

Backwards Ratio Method
Price histories of each underlying contract are multiplied by a constant amount, starting with the newest contract and working backwards, so as to eliminate jumps in price between consecutive contracts. On every roll date, we compute the ratio between the back contract's settle price and the front contract's settle price (back settle divided by front settle). The entire historical series is then multiplied by this ratio, adjusting the full contract history on every roll date. This method is conceptually similar to how adjustments are handled for stock splits.

To avoid biases when using the Ratio method, PL should be calculated based on price percentage changes. Consistent contango or backwardation can lead to very large or very small absolute magnitudes for historical prices, but percentage-based PL calculations should be immune to that.

rascott
Posts: 1070
Joined: Wed Apr 15, 2015 10:53 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Sat Sep 21, 2019 10:09 am

BTTFutures wrote:
Sat Sep 21, 2019 9:42 am
RandomWord wrote:
Mon Sep 09, 2019 1:02 pm
BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image
Can't really help, since I have no idea what the "backwards ratio adjusted open interest switch method" is. But it seems like this sort of thing is going to be highly dependand on the technical details of how they construct the continuous futures, especially if you're going back over a long time range. Bear in mind continuous futures aren't a "real" thing, they're entirely theoretical. The only futures you can actually invest in are tied to a specific month.
Here is the method explanation. Please reference the link I provided for more info. I used the percent change for my input into PV.

Backwards Ratio Method
Price histories of each underlying contract are multiplied by a constant amount, starting with the newest contract and working backwards, so as to eliminate jumps in price between consecutive contracts. On every roll date, we compute the ratio between the back contract's settle price and the front contract's settle price (back settle divided by front settle). The entire historical series is then multiplied by this ratio, adjusting the full contract history on every roll date. This method is conceptually similar to how adjustments are handled for stock splits.

To avoid biases when using the Ratio method, PL should be calculated based on price percentage changes. Consistent contango or backwardation can lead to very large or very small absolute magnitudes for historical prices, but percentage-based PL calculations should be immune to that.

I don't really fully grasp that.... but are you just looking for the returns of the actual futures contracts themselves? It seems the returns of the contract itself would never be near the returns of the underlying 2 year note (SHY), as you are ignoring the cost of carry between the 2 year and the 3 month t bill.

BTTFutures
Posts: 5
Joined: Sat Sep 07, 2019 4:27 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by BTTFutures » Mon Oct 07, 2019 8:50 pm

rascott wrote:
Fri Sep 13, 2019 3:49 pm
BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image

I assume you aren't accounting for putting all the excess cash in t bills?

See here

https://www.advisorperspectives.com/art ... res-market
A couple of follow up questions:
1. Can you explain how I put excess cash in t bills? Is this something that occurs automatically in my trading account? I'm not quite following the actual mechanics of how it works and why it isn't part of the quoted value.

2. Also, I'm not sure how I would simulate this. Do you use this rate?: https://fred.stlouisfed.org/series/DTB3 What is the total one day return from 10/3/2019 close to 10/4/2019 close for example?

Thanks for the help

rascott
Posts: 1070
Joined: Wed Apr 15, 2015 10:53 am

Re: Understanding using treasury futures for leverage to implement risk parity

Post by rascott » Mon Oct 07, 2019 9:16 pm

BTTFutures wrote:
Mon Oct 07, 2019 8:50 pm
rascott wrote:
Fri Sep 13, 2019 3:49 pm
BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image

I assume you aren't accounting for putting all the excess cash in t bills?

See here

https://www.advisorperspectives.com/art ... res-market
A couple of follow up questions:
1. Can you explain how I put excess cash in t bills? Is this something that occurs automatically in my trading account? I'm not quite following the actual mechanics of how it works and why it isn't part of the quoted value.

2. Also, I'm not sure how I would simulate this. Do you use this rate?: https://fred.stlouisfed.org/series/DTB3 What is the total one day return from 10/3/2019 close to 10/4/2019 close for example?

Thanks for the help

One 2 year future contract is currently at roughly $216k notional value. You only need $640 in your account to actually take this position. And you must maintain that amount in your cash account at all times. If you took the remaining $215,360 and bought t bills.... your return should theoretically match just buying $216k of 2 year Treasuries.

No this doesn't happen automatically.... you'd need to decide how much to keep in your cash account to cover the daily cash settlements of your futures position.... and then go buy T- bills with the remainder.... so obviously that cash drag is going to make it so you aren't perfectly getting the returns of just holding the notes in full, as most brokers pay squat for cash. Obviously nobody is going to do such a thing... they are using futures for leverage and you'd take your remaining capital to go buy something else with a better expected return than t- bills.

In reality, you are going to get whatever the returns of the 2 year might be... minus the financing cost (usually around 3 month LIBOR). I'm guessing that's what you are seeing when just looking at the returns of futures themselves. That means they are theoretically a money loser right now (LIBOR > 2 year yield) ...... however your gains/ losses are also going to be driven by what interest rates do.

Also it appears that LIBOR hasn't caught up yet with the Fed rate cut.... and as such we are still paying closer to 2% right now. But I imagine that's a short lived thing that should resolve itself within the next couple of weeks. I don't fully understand how the Fed Funds rate cut works its way through to T bills and LIBOR... but it historically does... just some degree of lag.

Using the CASHX position in PV should get you fairly close to simulating tbills.

BTTFutures
Posts: 5
Joined: Sat Sep 07, 2019 4:27 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by BTTFutures » Mon Oct 07, 2019 10:20 pm

rascott wrote:
Mon Oct 07, 2019 9:16 pm
BTTFutures wrote:
Mon Oct 07, 2019 8:50 pm
rascott wrote:
Fri Sep 13, 2019 3:49 pm
BTTFutures wrote:
Sat Sep 07, 2019 5:09 pm
I read through this thread and decided to test the theory using quandl data (https://www.quandl.com/databases/SCF/documentation). I used the backwards ratio adjusted open interest switch method with CME TU continuous futures( CME_TU1_OR). I found that open interest switch vs. first day of expire month switch method had very similar results. I then put the rolling futures data (daily settle value and date) in PV and found that the comparison was quite different. See below PV output. Can anyone help explain this difference and if I need to change my approach?

When using SPUST2TR (https://us.spindices.com/indices/fixed- ... turn-index) the results look great but these rolling futures results, with seemingly real futures data, have me worried. Any thoughts would be greatly appreciated!
Image

I assume you aren't accounting for putting all the excess cash in t bills?

See here

https://www.advisorperspectives.com/art ... res-market
A couple of follow up questions:
1. Can you explain how I put excess cash in t bills? Is this something that occurs automatically in my trading account? I'm not quite following the actual mechanics of how it works and why it isn't part of the quoted value.

2. Also, I'm not sure how I would simulate this. Do you use this rate?: https://fred.stlouisfed.org/series/DTB3 What is the total one day return from 10/3/2019 close to 10/4/2019 close for example?

Thanks for the help

One 2 year future contract is currently at roughly $216k notional value. You only need $640 in your account to actually take this position. And you must maintain that amount in your cash account at all times. If you took the remaining $215,360 and bought t bills.... your return should theoretically match just buying $216k of 2 year Treasuries.

No this doesn't happen automatically.... you'd need to decide how much to keep in your cash account to cover the daily cash settlements of your futures position.... and then go buy T- bills with the remainder.... so obviously that cash drag is going to make it so you aren't perfectly getting the returns of just holding the notes in full, as most brokers pay squat for cash. Obviously nobody is going to do such a thing... they are using futures for leverage and you'd take your remaining capital to go buy something else with a better expected return than t- bills.

In reality, you are going to get whatever the returns of the 2 year might be... minus the financing cost (usually around 3 month LIBOR). I'm guessing that's what you are seeing when just looking at the returns of futures themselves. That means they are theoretically a money loser right now (LIBOR > 2 year yield) ...... however your gains/ losses are also going to be driven by what interest rates do.

Also it appears that LIBOR hasn't caught up yet with the Fed rate cut.... and as such we are still paying closer to 2% right now. But I imagine that's a short lived thing that should resolve itself within the next couple of weeks. I don't fully understand how the Fed Funds rate cut works its way through to T bills and LIBOR... but it historically does... just some degree of lag.

Using the CASHX position in PV should get you fairly close to simulating tbills.
Thanks this makes sense but now I don't see how futures can help with leverage per the above Kessler article. If you are allocating the same amount of money ($640 margin + $215,360 Cash) how are they creating a 3.3x leveraged portfolio? The 2 yr futures plus excess cash in t bills returns 4% on average annually which is not much better than margin borrow rates so a 2x leverage in a margin account would be impractical. This would only be possible for mutual fund managers that can borrow at extremely low rates, correct?

Basically, if everything you say is accurate this whole approach with futures is wrong and the leveraged ETFs are the best approach. The 2 yr futures over the long-run returns less than 1% on average (CAGR) with a negative sharp ratio. Which is of course a terrible approach for long term investing.

Topic Author
DonIce
Posts: 732
Joined: Thu Feb 21, 2019 6:44 pm

Re: Understanding using treasury futures for leverage to implement risk parity

Post by DonIce » Mon Oct 07, 2019 10:24 pm

BTTFutures wrote:
Mon Oct 07, 2019 10:20 pm
Thanks this makes sense but now I don't see how futures can help with leverage per the above Kessler article. If you are allocating the same amount of money ($640 margin + $215,360 Cash) how are they creating a 3.3x leveraged portfolio? The 2 yr futures plus excess cash in t bills returns 4% on average annually which is not much better than margin borrow rates so a 2x leverage in a margin account would be impractical. This would only be possible for mutual fund managers that can borrow at extremely low rates, correct?

Basically, if everything you say is accurate this whole approach with futures is wrong and the leveraged ETFs are the best approach. The 2 yr futures over the long-run returns less than 1% on average (CAGR) with a negative sharp ratio. Which is of course a terrible approach for long term investing.
The point is that you don't actually need to keep around $215,360 in cash. You COULD do that, but more likely you would just keep around a few thousand in cash, and invest the rest of your capital elsewhere. You might, for example, only have $10k of capital to begin with and you can still do this.

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