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

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willthrill81
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by willthrill81 » Sat Jun 22, 2019 3:19 pm

gtwhitegold wrote:
Sat Jun 22, 2019 3:10 pm
MetaPhysician wrote:
Sat Jun 22, 2019 3:04 pm
Thank you to @HEDGEFUNDIE and those who are willing to share their thoughts and strategies.

Any thoughts on constructing a portfolio which mimic's Taleb's Black Swan set up where the majority of the portfolio is in ultra-safe positions and a very minor part which has tremendous upside when the overall market tanks?

For example:
80-90% LTT
10-20% 3x *inverse* S&P
I wouldn't recommend that unless you just want to lose money.
I agree. That would be a horrific strategy. From 2010 until May, 2019, 80% in VUSTX (LTT) and 20% in 3x inverse S&P 500 (SPXU) would have averaged a -3.55% return, meaning that a lump sum investment would now be valued at about 71% of its inflation-adjusted starting value. Uh uh. You would have been far better off with a Larry Portfolio with something like 70% LTT, 15% EM, and 15% SCV, which would have had a real return of 5.26% inflation-adjusted return over the same period.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by MetaPhysician » Sat Jun 22, 2019 6:17 pm

gtwhitegold wrote:
Sat Jun 22, 2019 3:10 pm
MetaPhysician wrote:
Sat Jun 22, 2019 3:04 pm
Thank you to @HEDGEFUNDIE and those who are willing to share their thoughts and strategies.

Any thoughts on constructing a portfolio which mimic's Taleb's Black Swan set up where the majority of the portfolio is in ultra-safe positions and a very minor part which has tremendous upside when the overall market tanks?

For example:
80-90% LTT
10-20% 3x *inverse* S&P
I wouldn't recommend that unless you just want to lose money. You would probably want to invest in a fund that sells options instead like AVPRX, Stone Ridge All Asset Variance Risk Premium Fund.
Could you please explain why you like that fund?

I am aware that the majority of the time in the funds I proposed there would be little to no gain and more likely a loss each year. But, the loss would be minor and controllable. Meaning I would not get wiped out. It would 'pay' off if the market tanks which would be very statistically unlikely to happen. But if did, the upside would cover for all the years/decades of minor losses.

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willthrill81
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by willthrill81 » Sat Jun 22, 2019 6:23 pm

MetaPhysician wrote:
Sat Jun 22, 2019 6:17 pm
gtwhitegold wrote:
Sat Jun 22, 2019 3:10 pm
MetaPhysician wrote:
Sat Jun 22, 2019 3:04 pm
Thank you to @HEDGEFUNDIE and those who are willing to share their thoughts and strategies.

Any thoughts on constructing a portfolio which mimic's Taleb's Black Swan set up where the majority of the portfolio is in ultra-safe positions and a very minor part which has tremendous upside when the overall market tanks?

For example:
80-90% LTT
10-20% 3x *inverse* S&P
I wouldn't recommend that unless you just want to lose money. You would probably want to invest in a fund that sells options instead like AVPRX, Stone Ridge All Asset Variance Risk Premium Fund.
Could you please explain why you like that fund?

I am aware that the majority of the time in the funds I proposed there would be little to no gain and more likely a loss each year. But, the loss would be minor and controllable. Meaning I would not get wiped out. It would 'pay' off if the market tanks which would be very statistically unlikely to happen. But if did, the upside would cover for all the years/decades of minor losses.
Again, this is a terrible strategy. If you don't want to get "wiped out" by stocks, then don't put any money in stocks that you can't afford to lose.

Making a long-term bet like this against the U.S. stock market would, historically, have turned out to be terrible most of the time.

If you want to be guaranteed to not lose your inflation-adjusted principal, then only buy TIPS, and only buy them when the real yield is positive, which it is now.
Last edited by willthrill81 on Sat Jun 22, 2019 6:25 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by MotoTrojan » Sat Jun 22, 2019 6:25 pm

MetaPhysician wrote:
Sat Jun 22, 2019 6:17 pm
gtwhitegold wrote:
Sat Jun 22, 2019 3:10 pm
MetaPhysician wrote:
Sat Jun 22, 2019 3:04 pm
Thank you to @HEDGEFUNDIE and those who are willing to share their thoughts and strategies.

Any thoughts on constructing a portfolio which mimic's Taleb's Black Swan set up where the majority of the portfolio is in ultra-safe positions and a very minor part which has tremendous upside when the overall market tanks?

For example:
80-90% LTT
10-20% 3x *inverse* S&P
I wouldn't recommend that unless you just want to lose money. You would probably want to invest in a fund that sells options instead like AVPRX, Stone Ridge All Asset Variance Risk Premium Fund.
Could you please explain why you like that fund?

I am aware that the majority of the time in the funds I proposed there would be little to no gain and more likely a loss each year. But, the loss would be minor and controllable. Meaning I would not get wiped out. It would 'pay' off if the market tanks which would be very statistically unlikely to happen. But if did, the upside would cover for all the years/decades of minor losses.
Can you back that last part up? Even if you got a pure 3x gain (triple a 50% market crash, which isn’t a common occurrence) that’s only a 60% gain overall on the equity portion with 20% inverse exposure.

klaus14
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by klaus14 » Sat Jun 22, 2019 7:09 pm

MotoTrojan wrote:
Fri Jun 21, 2019 10:39 pm

If both proportionally increase volatility compared to historical norms I’m right back at 40/60, where I’m fine being anyways. Yes I plan to rebalance monthly and use PV to determine weights (could go manually if it’s not functional in future).
I thought PV only has end of month numbers. How could you get 30 day volatility from there?

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

Post by MotoTrojan » Sat Jun 22, 2019 7:24 pm

klaus14 wrote:
Sat Jun 22, 2019 7:09 pm
MotoTrojan wrote:
Fri Jun 21, 2019 10:39 pm

If both proportionally increase volatility compared to historical norms I’m right back at 40/60, where I’m fine being anyways. Yes I plan to rebalance monthly and use PV to determine weights (could go manually if it’s not functional in future).
I thought PV only has end of month numbers. How could you get 30 day volatility from there?
It provides 20 day minimum (can do longer too) volatility window so it must have more inputs, even if it only outputs monthly returns. 20 trading days will be my proxy for each month. These can only be found in the timing method tool.

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

Post by gtwhitegold » Sat Jun 22, 2019 7:29 pm

MetaPhysician wrote:
Sat Jun 22, 2019 6:17 pm
gtwhitegold wrote:
Sat Jun 22, 2019 3:10 pm
MetaPhysician wrote:
Sat Jun 22, 2019 3:04 pm
Thank you to @HEDGEFUNDIE and those who are willing to share their thoughts and strategies.

Any thoughts on constructing a portfolio which mimic's Taleb's Black Swan set up where the majority of the portfolio is in ultra-safe positions and a very minor part which has tremendous upside when the overall market tanks?

For example:
80-90% LTT
10-20% 3x *inverse* S&P
I wouldn't recommend that unless you just want to lose money. You would probably want to invest in a fund that sells options instead like AVPRX, Stone Ridge All Asset Variance Risk Premium Fund.
Could you please explain why you like that fund?

I am aware that the majority of the time in the funds I proposed there would be little to no gain and more likely a loss each year. But, the loss would be minor and controllable. Meaning I would not get wiped out. It would 'pay' off if the market tanks which would be very statistically unlikely to happen. But if did, the upside would cover for all the years/decades of minor losses.
Because you're selling insurance in a manner which is rewarded. Which is more like what Taleb intends (I think) than your idea.

klaus14
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by klaus14 » Sat Jun 22, 2019 8:05 pm

MotoTrojan wrote:
Sat Jun 22, 2019 7:24 pm
klaus14 wrote:
Sat Jun 22, 2019 7:09 pm
MotoTrojan wrote:
Fri Jun 21, 2019 10:39 pm

If both proportionally increase volatility compared to historical norms I’m right back at 40/60, where I’m fine being anyways. Yes I plan to rebalance monthly and use PV to determine weights (could go manually if it’s not functional in future).
I thought PV only has end of month numbers. How could you get 30 day volatility from there?
It provides 20 day minimum (can do longer too) volatility window so it must have more inputs, even if it only outputs monthly returns. 20 trading days will be my proxy for each month. These can only be found in the timing method tool.
ok i see under adaptive allocation it allows you to pick 20d. and at the bottom of "timing periods" it shows the volatilities.

klaus14
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by klaus14 » Sat Jun 22, 2019 9:05 pm

Are risk parity and inverse volatility the same things?

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

Post by gtwhitegold » Sat Jun 22, 2019 9:13 pm

klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.

klaus14
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by klaus14 » Sat Jun 22, 2019 9:23 pm

gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Thanks. Then risk parity is better?

gtwhitegold
Posts: 433
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by gtwhitegold » Sat Jun 22, 2019 9:44 pm

klaus14 wrote:
Sat Jun 22, 2019 9:23 pm
gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Thanks. Then risk parity is better?
I would say that it would depend on what you are trying to achieve. If you feel that every component of your portfolio is completely independent and should be weighed individually, then you should use inverse volatility weighing. If you feel that they are somehow interconnected, then you should use risk parity and adjust the weights in your portfolio whenever you rebalance your portfolio.

klaus14
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by klaus14 » Sat Jun 22, 2019 9:51 pm

gtwhitegold wrote:
Sat Jun 22, 2019 9:44 pm

I would say that it would depend on what you are trying to achieve. If you feel that every component of your portfolio is completely independent and should be weighed individually, then you should use inverse volatility weighing. If you feel that they are somehow interconnected, then you should use risk parity and adjust the weights in your portfolio whenever you rebalance your portfolio.
if components are independent, correlations would be around zero and risk parity would generate the same allocations right?

So maybe you are saying, if i don't have confidence past correlations will persist? But then, you can also suspect if past volatilities will be predictive or not..

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

Post by MotoTrojan » Sun Jun 23, 2019 12:01 am

gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Can you elaborate on how risk parity accounts for correlations? Is it not just adjusting weight so each asset is individually contributing an equal component of volatility? Why would correlation matter?

I’m still struggling to find a quality reference on the difference in rationales.

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

Post by MotoTrojan » Sun Jun 23, 2019 1:30 am

Interesting read comparing target volatility management results for different asset classes. Works much better with equities and risk assets than bonds/commodities.

https://poseidon01.ssrn.com/delivery.ph ... 93&EXT=pdf

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

Post by gtwhitegold » Sun Jun 23, 2019 10:38 am

MotoTrojan wrote:
Sun Jun 23, 2019 12:01 am
gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Can you elaborate on how risk parity accounts for correlations? Is it not just adjusting weight so each asset is individually contributing an equal component of volatility? Why would correlation matter?

I’m still struggling to find a quality reference on the difference in rationales.
https://gestaltu.com/2013/10/dynamic-as ... rity.html/

Above is a description of inverse volatility weighing (also known as naive risk parity.

https://blogs.cfainstitute.org/investor ... -readings/

This is a good description of risk parity.

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

Post by MotoTrojan » Sun Jun 23, 2019 11:39 am

gtwhitegold wrote:
Sun Jun 23, 2019 10:38 am
MotoTrojan wrote:
Sun Jun 23, 2019 12:01 am
gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Can you elaborate on how risk parity accounts for correlations? Is it not just adjusting weight so each asset is individually contributing an equal component of volatility? Why would correlation matter?

I’m still struggling to find a quality reference on the difference in rationales.
https://gestaltu.com/2013/10/dynamic-as ... rity.html/

Above is a description of inverse volatility weighing (also known as naive risk parity.

https://blogs.cfainstitute.org/investor ... -readings/

This is a good description of risk parity.
Apologies but I didn’t see how the 2nd link was driven by correlations and not simply evening out the risk distribution similar to the 1st link. I feel like I’m missing something right in my face...

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

Post by Dr. Long » Sun Jun 23, 2019 2:30 pm

New user, thank you very much to OP and company for this thread. I didn't see this question asked (forgive me if it has been):

Will you confine yourself to quarterly rebalances no matter what happens? Lets say alien black swan muppets instigate a crash and over a series of days (or weeks) your UPRO gets severly punished, to where your ratio ends up being less than 10% UPRO. Will you still wait until your quarterly date to rebalance?

With a M1 Roth Ira you could do monthly rebalancing at no tax penalty, with additional rebalances in extrordinary "crash"-type events - would this not be more efficient than quarterly?

Again, thanks for the thread.
"(It's) the economy, stupid," - James Carville

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

Post by samsdad » Sun Jun 23, 2019 3:09 pm

Dr. Long wrote:
Sun Jun 23, 2019 2:30 pm
Will you confine yourself to quarterly rebalances no matter what happens?


That’s what I plan to do.


Lets say alien black swan muppets instigate a crash and over a series of days (or weeks) your UPRO gets severly punished, to where your ratio ends up being less than 10% UPRO.


“Alien black swan muppets”... lol, those weenies?


Will you still wait until your quarterly date to rebalance?


As opposed to immediately rebalancing to only watch it then plunge more? No, I’ll wait. No timing other than the quarterly rebalancing.


With a M1 Roth Ira you could do monthly rebalancing at no tax penalty, with additional rebalances in extrordinary "crash"-type events - would this not be more efficient than quarterly?


Quarterly performs the best in all the testing I did awhile back when I was concerned with such triviality. Stop trying to time the market.

Again, thanks for the thread.

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

Post by MotoTrojan » Sun Jun 23, 2019 3:12 pm

Dr. Long wrote:
Sun Jun 23, 2019 2:30 pm
New user, thank you very much to OP and company for this thread. I didn't see this question asked (forgive me if it has been):

Will you confine yourself to quarterly rebalances no matter what happens? Lets say alien black swan muppets instigate a crash and over a series of days (or weeks) your UPRO gets severly punished, to where your ratio ends up being less than 10% UPRO. Will you still wait until your quarterly date to rebalance?

With a M1 Roth Ira you could do monthly rebalancing at no tax penalty, with additional rebalances in extrordinary "crash"-type events - would this not be more efficient than quarterly?

Again, thanks for the thread.
Well at least with my version (1 month look back risk parity reset) you’d probably be going close to 10% UPRO that month anyways, and then well over 40% as things stabilized. I think I’d hang tight though on quarterly. More realistic is a 20% drop like we saw in December. Hindsight is 20/20 so it’s easy to say that the 12/31/18 quarterly rebalance helped, but what if it was the start of another 2008.

A true Alien invasion would probably hurt treasuries too :).

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

Post by PluckyDucky » Sun Jun 23, 2019 3:24 pm

samsdad wrote:
Sun Jun 23, 2019 3:09 pm
Dr. Long wrote:
Sun Jun 23, 2019 2:30 pm
Will you confine yourself to quarterly rebalances no matter what happens?


That’s what I plan to do.


Lets say alien black swan muppets instigate a crash and over a series of days (or weeks) your UPRO gets severly punished, to where your ratio ends up being less than 10% UPRO.


“Alien black swan muppets”... lol, those weenies?


Will you still wait until your quarterly date to rebalance?


As opposed to immediately rebalancing to only watch it then plunge more? No, I’ll wait. No timing other than the quarterly rebalancing.


With a M1 Roth Ira you could do monthly rebalancing at no tax penalty, with additional rebalances in extrordinary "crash"-type events - would this not be more efficient than quarterly?


Quarterly performs the best in all the testing I did awhile back when I was concerned with such triviality. Stop trying to time the market.

Again, thanks for the thread.
If I saw it plunge 90-95% without some structural reason for it, e.g. the ETF failing, heck yeah I'd rebalance. Buy low sell high.

But inside a range of 20% off my mark, no.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by 305pelusa » Sun Jun 23, 2019 3:33 pm

MotoTrojan wrote:
Sun Jun 23, 2019 11:39 am
gtwhitegold wrote:
Sun Jun 23, 2019 10:38 am
MotoTrojan wrote:
Sun Jun 23, 2019 12:01 am
gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm
klaus14 wrote:
Sat Jun 22, 2019 9:05 pm
Are risk parity and inverse volatility the same things?
No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Can you elaborate on how risk parity accounts for correlations? Is it not just adjusting weight so each asset is individually contributing an equal component of volatility? Why would correlation matter?

I’m still struggling to find a quality reference on the difference in rationales.
https://gestaltu.com/2013/10/dynamic-as ... rity.html/

Above is a description of inverse volatility weighing (also known as naive risk parity.

https://blogs.cfainstitute.org/investor ... -readings/

This is a good description of risk parity.
Apologies but I didn’t see how the 2nd link was driven by correlations and not simply evening out the risk distribution similar to the 1st link. I feel like I’m missing something right in my face...
Given two assets with standard deviations s_1 and s_2 and a correlation of c_12, in proportions x_1 and x_2 (where x_1+x_2 = 1), the standard deviation of the portfolio will be:

s_portfolio = (x_1^2*s_1^2 + x_2^2*s_2^2 + 2*x_1*x_2*s_1*s_2*c_12)^(0.5) (EQ 1)

The first term is the risk contribution from the first asset. The second term is the risk contribution of the second asset. The third term can be split in half, with each asset contributing one half of it. It's also known as covariance. So:
Asset 1's volatility contribution = x_1^2*s_1^2 + x_1*x_2*s_1*s_2*c_12 (EQ 2)
Asset 2's volatility contribution = x_2^2*s_2^2 + x_1*x_2*s_1*s_2*c_12 (EQ 3)

Risk parity is achieved when the risk contribution of asset 1 and 2 is equal. Clearly then the second term of EQ2 and EQ3 cancels out when you set the two equations equal to zero. When you solve for x_1 and x_2, you'll find it's just the inverse of their standard deviations. Hence, with just two assets, risk parity is identical to inverse volatility.


Three assets (or more)
Introduce asset with proportion x_3, st. dev s_3, and correlations of c_13 and c_23 for each of the other two assets. Impose x_1+x_2+x_3 = 1.
What happens now is that you add additional covariance terms.

Asset 1's volatility contribution = x_1^2*s_1^2 + x_1*x_2*s_1*s_2*c_12 + x_1*x_3*s_1*s_3*c_13 (EQ 4)
Asset 2's volatility contribution = x_2^2*s_2^2 + x_1*x_2*s_1*s_2*c_12 + x_2*x_3*s_2*s_3*c_23 (EQ 5)
Asset 3's volatility contribution = x_3^2*s_3^2 + x_1*x_3*s_1*s_3*c_13 + x_2*x_3*s_2*s_3*c_23 (EQ 6)

Again, risk parity is achieved when those contributions are equal. We have x_1 + x_2 + x_3 = 1. We also have EQ4 = EQ5 and EQ5 = EQ6. That's 3 equations and three unknowns (x_1, x_2 and x_3). It might initially look like we have four equations (EQ4 = EQ6 also) but that's not actually an independent equation and is simply a linear combination of the aforementioned three equations.

Note that if c_12 = c_13 = c_23 = 0, it just devolves into inverse volatility, aka naive risk parity.


Wolfram alpha can probably solve the above. But if you're going to solve for more complex portfolios (5+ assets), I recommend you make yourself a little Matlab script to solve systems of equations.

Hope that's helpful.

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

Post by MotoTrojan » Sun Jun 23, 2019 4:02 pm

305pelusa wrote:
Sun Jun 23, 2019 3:33 pm
MotoTrojan wrote:
Sun Jun 23, 2019 11:39 am
gtwhitegold wrote:
Sun Jun 23, 2019 10:38 am
MotoTrojan wrote:
Sun Jun 23, 2019 12:01 am
gtwhitegold wrote:
Sat Jun 22, 2019 9:13 pm


No, inverse volatility doesn't account for correlations, but risk parity does.

If you are only holding two assets, then they are effectively the same however.
Can you elaborate on how risk parity accounts for correlations? Is it not just adjusting weight so each asset is individually contributing an equal component of volatility? Why would correlation matter?

I’m still struggling to find a quality reference on the difference in rationales.
https://gestaltu.com/2013/10/dynamic-as ... rity.html/

Above is a description of inverse volatility weighing (also known as naive risk parity.

https://blogs.cfainstitute.org/investor ... -readings/

This is a good description of risk parity.
Apologies but I didn’t see how the 2nd link was driven by correlations and not simply evening out the risk distribution similar to the 1st link. I feel like I’m missing something right in my face...
Given two assets with standard deviations s_1 and s_2 and a correlation of c_12, in proportions x_1 and x_2 (where x_1+x_2 = 1), the standard deviation of the portfolio will be:

s_portfolio = (x_1^2*s_1^2 + x_2^2*s_2^2 + 2*x_1*x_2*s_1*s_2*c_12)^(0.5) (EQ 1)

The first term is the risk contribution from the first asset. The second term is the risk contribution of the second asset. The third term can be split in half, with each asset contributing one half of it. It's also known as covariance. So:
Asset 1's volatility contribution = x_1^2*s_1^2 + x_1*x_2*s_1*s_2*c_12 (EQ 2)
Asset 2's volatility contribution = x_2^2*s_2^2 + x_1*x_2*s_1*s_2*c_12 (EQ 3)

Risk parity is achieved when the risk contribution of asset 1 and 2 is equal. Clearly then the second term of EQ2 and EQ3 cancels out when you set the two equations equal to zero. When you solve for x_1 and x_2, you'll find it's just the inverse of their standard deviations. Hence, with just two assets, risk parity is identical to inverse volatility.


Three assets (or more)
Introduce asset with proportion x_3, st. dev s_3, and correlations of c_13 and c_23 for each of the other two assets. Impose x_1+x_2+x_3 = 1.
What happens now is that you add additional covariance terms.

Asset 1's volatility contribution = x_1^2*s_1^2 + x_1*x_2*s_1*s_2*c_12 + x_1*x_3*s_1*s_3*c_13 (EQ 4)
Asset 2's volatility contribution = x_2^2*s_2^2 + x_1*x_2*s_1*s_2*c_12 + x_2*x_3*s_2*s_3*c_23 (EQ 5)
Asset 3's volatility contribution = x_3^2*s_3^2 + x_1*x_3*s_1*s_3*c_13 + x_2*x_3*s_2*s_3*c_23 (EQ 6)

Again, risk parity is achieved when those contributions are equal. We have x_1 + x_2 + x_3 = 1. We also have EQ4 = EQ5 and EQ5 = EQ6. That's 3 equations and three unknowns (x_1, x_2 and x_3). It might initially look like we have four equations (EQ4 = EQ6 also) but that's not actually an independent equation and is simply a linear combination of the aforementioned three equations.

Note that if c_12 = c_13 = c_23 = 0, it just devolves into inverse volatility, aka naive risk parity.


Wolfram alpha can probably solve the above. But if you're going to solve for more complex portfolios (5+ assets), I recommend you make yourself a little Matlab script to solve systems of equations.

Hope that's helpful.
Entirely, thank you. Risk parity allocation changes are also changing the total volatility due to imperfect correlation and thus the fraction of each constituents contribution. Naive ignores this. Makes perfect sense now.

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

Post by MotoTrojan » Sun Jun 23, 2019 4:04 pm

PluckyDucky wrote:
Sun Jun 23, 2019 3:24 pm
samsdad wrote:
Sun Jun 23, 2019 3:09 pm
Dr. Long wrote:
Sun Jun 23, 2019 2:30 pm
Will you confine yourself to quarterly rebalances no matter what happens?


That’s what I plan to do.


Lets say alien black swan muppets instigate a crash and over a series of days (or weeks) your UPRO gets severly punished, to where your ratio ends up being less than 10% UPRO.


“Alien black swan muppets”... lol, those weenies?


Will you still wait until your quarterly date to rebalance?


As opposed to immediately rebalancing to only watch it then plunge more? No, I’ll wait. No timing other than the quarterly rebalancing.


With a M1 Roth Ira you could do monthly rebalancing at no tax penalty, with additional rebalances in extrordinary "crash"-type events - would this not be more efficient than quarterly?


Quarterly performs the best in all the testing I did awhile back when I was concerned with such triviality. Stop trying to time the market.

Again, thanks for the thread.
If I saw it plunge 90-95% without some structural reason for it, e.g. the ETF failing, heck yeah I'd rebalance. Buy low sell high.

But inside a range of 20% off my mark, no.
What about a 60% plunge?

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

Post by samsdad » Sun Jun 23, 2019 4:28 pm

Plunge shmunge. The testing shows that quarterly wins, at least in the risk-parity strategy espoused by OP.

Everything else looks too cute for my tastes, YMMV.

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

Post by Dr. Long » Sun Jun 23, 2019 10:32 pm

Thank you all for the input on balancing. I have been lurking through this thread for about a week, I am considering joining this strategy (experiment?) with a 25 year horizon, balancing quarterly, fully prepared to loose most or all, using an M1 Roth IRA. I just have a few more pieces of data to mull over before committing. Knowing myself, if I do join the journey I want to make sure I have a clear set of rules I will not deviate from down the road.

Again, thank you OP & company for all the work put into this thread.
"(It's) the economy, stupid," - James Carville

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

Post by MotoTrojan » Mon Jun 24, 2019 1:32 am

Dr. Long wrote:
Sun Jun 23, 2019 10:32 pm
Thank you all for the input on balancing. I have been lurking through this thread for about a week, I am considering joining this strategy (experiment?) with a 25 year horizon, balancing quarterly, fully prepared to loose most or all, using an M1 Roth IRA. I just have a few more pieces of data to mull over before committing. Knowing myself, if I do join the journey I want to make sure I have a clear set of rules I will not deviate from down the road.

Again, thank you OP & company for all the work put into this thread.
Welcome! The quarterly rebalance out-performance has been a major annoyance for me. I just played with it more and noted for the first time the drawdown also increased significantly at 1-month 40/60 rebalancing to ~60%. We are all gambling but I dislike performance boosting conditions without logical bases.

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

Post by Hydromod » Mon Jun 24, 2019 2:18 am

I've started doing some systematic backtesting with different strategies using Matlab. I’m excited by the results, but they are definitely preliminary and I need further testing to make sure I’m not making stupid mistakes. I’m sharing a bit early, because I’m trying to get at some of the issues related to rebalancing frequency and volatility.

I pulled in the UPROSIM and TMFSIM databases that the OP linked to, augmented by the daily UPRO and TMF returns since then. The strategy is to use sequences with specified duration starting on every possible starting day in the history, and construct a cumulative distribution from these. This mitigates issues with timing to some extent.

So far I’ve looked at three factors: (i) sequence duration (investing horizon), (ii) rebalancing frequency, and (iii) weighting scheme.

The sequence duration strongly affects the CAGR distribution, as is expected. For example, for the one-year durations with the standard 40/60 weighting and quarterly rebalancing, 10 percent of the periods have CAGR < -15% and 10% have CAGR > 50%. For the 25-year durations, the same strategy changes to CAGR < +14% and CAGR > +17.6. So it would have been a ride on short time scales, as many have pointed out.

I looked at rebalancing frequencies between daily and annual (in trading days, I did 1, 2, 5, 10, 20, 40, 60, 120, and 250 days). The rebalancing frequency tends to shift the CAGR more or less uniformly up and down. There were generally three groups: (i) daily to weekly rebalancing, (ii) biweekly to quarterly, and (iii) longer than quarterly. The biweekly to quarterly cohorts generally had similar distributions. Daily rebalancing performed best, usually about 1 to 2 percentage points better than the biweekly to quarterly cohorts. The statistics on the semiannual and (especially) the annual cases began to deviate from the more frequent rebalancing cases.

This is an area where a fund might offer a real systematic advantage, if they could efficiently perform the daily rebalancing trades.

The weighting scheme has been a big discussion point recently. I’ve implemented the constant-weighting and inverse-volatility weighting schemes.

For the constant-weighting scheme and the 25-year horizon:

30/70 weighting: expected CAGR of 17.6%, 15.9%, 15.9%, 16.1%, and 16.6% for daily, monthly, bimonthly, quarterly, and semiannual rebalancing frequencies.

40/60 weighting: expected CAGR of 17.9%, 16.2%, 16.3%, 16.5%, and 17.0% for daily, monthly, bimonthly, quarterly, and semiannual rebalancing frequencies.

50/50 weighting: expected CAGR of 17.9%, 16.2%, 16.3%, 16.6%, and 17.2% for daily, monthly, bimonthly, quarterly, and semiannual rebalancing frequencies.

For this, expected CAGR means 50% of the observations were higher and 50% lower.

The constant-weighting schemes had a pattern of (i) best CAGR at daily rebalancing, (ii) decreasing CAGR with decreasing frequency to about biweekly rebalancing, (iii) rebounding CAGR to semiannual, then (iv) unreliable estimates for annual rebalancing. It’s not entirely clear why there was a rebound with longer rebalancing frequency; I suspect that perhaps the extended bulls allowed the UPRO licensing to compound for a longer duration.

The inverse-volatility scheme has the length of the observation period for calculating volatility come in to play because the idea is to forecast the best weights during the interval between rebalances. There is an interplay between rebalancing frequency and the length of the observation period for calculating volatility as well, because frequent rebalancing might be able to take advantage of very recent volatility estimates.

I looked at volatility periods of 10, 20, 40, 60, 120, and 250 trading days, combined with the daily, monthly, bimonthly, quarterly, and semiannual rebalancing frequencies.

Out of the cases I looked at, the overall highest expected CAGR was 20.0% with biweekly rebalancing for two cases: (i) a 10-day volatility period and (ii) a quarterly volatility period.

The expected CAGR for the quarterly rebalancing was 18.7%, 18.8%, 18.7%, 18.6%, 17.8%, and 17.7% for volatility periods of 10, 20, 40, 60, 120, and 250 days. Other rebalancing periods had qualitatively similar behavior.

So it appears that CAGR would increase by 1 to 3 percentage points using moderately short-term volatility estimates to redo the weights. Even updating the weights on an annual basis provides some improvement over holding the weights fixed. But the improvement is on a statistical basis; there is no guarantee for any particular time history.

TL;DR Daily rebalancing helps, but nobody can do this on their own. Usually monthly to quarterly rebalancing gives similar CAGR over multiyear periods. Updating weights using inverse-volatility calculations appears to improve overall CAGR by 1 to 3 percentage points; generally good results would be expected with volatility estimates based on the previous 1 to 3 months, but even 1-year estimates offer improvement.

Hopes this helps folks in their thoughts. I'm out of the country so I may not be able to easily provide better input this week.

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

Post by PluckyDucky » Mon Jun 24, 2019 9:37 am

How far back does the data you used go?

1955 or 1987?

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

Post by Hydromod » Mon Jun 24, 2019 9:44 am

PluckyDucky wrote:
Mon Jun 24, 2019 9:37 am
How far back does the data you used go?

1955 or 1987?
Only to 1986. The data linked for 1955 to 1986 is monthly instead of daily, which doesn't help for this approach.

I don't know if the monthly data were summarized from a daily set or not. I'd love to see the daily data.

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

Post by MotoTrojan » Mon Jun 24, 2019 10:02 am

Hydromod wrote:
Mon Jun 24, 2019 9:44 am
PluckyDucky wrote:
Mon Jun 24, 2019 9:37 am
How far back does the data you used go?

1955 or 1987?
Only to 1986. The data linked for 1955 to 1986 is monthly instead of daily, which doesn't help for this approach.

I don't know if the monthly data were summarized from a daily set or not. I'd love to see the daily data.
No daily data but they did have monthly volatility incorporated so Matlab could definitely run the data set.

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

Post by columbia » Mon Jun 24, 2019 10:31 am

Today is a free lunch day for this approach.

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

Post by MotoTrojan » Mon Jun 24, 2019 10:50 am

columbia wrote:
Mon Jun 24, 2019 10:31 am
Today is a free lunch day for this approach.
Huh? Nothing extraordinary today.

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

Post by jaj2276 » Mon Jun 24, 2019 3:40 pm

I'm wondering if someone can help me out. The talk of the variants of the naive risk parity portfolio made me want to look a bit further into the details of my portfolio.

If I take the data from July 30 2002 for SPY and TLT, I get annualized volatility of 0.184 and 0.132. The correlation is -0.405.

If I try to find the portfolio volatility of a 40/60 portfolio, I get a value of 0.0837. Is this correct? My formula was:

sqrt( 0.4^2*0.184^2 + 0.6^2*0.132^2 + 2*0.4*0.6*-0.405*0.184*0.132)=0.0837

Does that mean my portfolio is an 8.3 vol portfolio?

The OP stated that the historical vol for treasuries as 10% and equities as 15%. He also stated the correlation for the two assets was 0. If I plug in those numbers to the equation the vol of the portfolio is 0.848. So I think I'm doing something wrong but can't figure out what it is. Sorry for the elementary diversion.

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

Post by MotoTrojan » Mon Jun 24, 2019 4:04 pm

jaj2276 wrote:
Mon Jun 24, 2019 3:40 pm
I'm wondering if someone can help me out. The talk of the variants of the naive risk parity portfolio made me want to look a bit further into the details of my portfolio.

If I take the data from July 30 2002 for SPY and TLT, I get annualized volatility of 0.184 and 0.132. The correlation is -0.405.

If I try to find the portfolio volatility of a 40/60 portfolio, I get a value of 0.0837. Is this correct? My formula was:

sqrt( 0.4^2*0.184^2 + 0.6^2*0.132^2 + 2*0.4*0.6*-0.405*0.184*0.132)=0.0837

Does that mean my portfolio is an 8.3 vol portfolio?

The OP stated that the historical vol for treasuries as 10% and equities as 15%. He also stated the correlation for the two assets was 0. If I plug in those numbers to the equation the vol of the portfolio is 0.848. So I think I'm doing something wrong but can't figure out what it is. Sorry for the elementary diversion.
Just means the current volatility ratio is off from the historic simplification of 40/60. I didn't check your math otherwise, but it would be strange if it always lined up.
Last edited by MotoTrojan on Mon Jun 24, 2019 4:26 pm, edited 1 time in total.

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

Post by Hydromod » Mon Jun 24, 2019 4:18 pm

jaj2276 wrote:
Mon Jun 24, 2019 3:40 pm
I'm wondering if someone can help me out. The talk of the variants of the naive risk parity portfolio made me want to look a bit further into the details of my portfolio.

If I take the data from July 30 2002 for SPY and TLT, I get annualized volatility of 0.184 and 0.132. The correlation is -0.405.

If I try to find the portfolio volatility of a 40/60 portfolio, I get a value of 0.0837. Is this correct? My formula was:

sqrt( 0.4^2*0.184^2 + 0.6^2*0.132^2 + 2*0.4*0.6*-0.405*0.184*0.132)=0.0837

Does that mean my portfolio is an 8.3 vol portfolio?

The OP stated that the historical vol for treasuries as 10% and equities as 15%. He also stated the correlation for the two assets was 0. If I plug in those numbers to the equation the vol of the portfolio is 0.848. So I think I'm doing something wrong but can't figure out what it is. Sorry for the elementary diversion.
I get the same value in the first example.

I get 0.0849 for the second. Sqrt((0.1*0.6)^2 + (0.15*0.4)^2)

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

Post by hdas » Mon Jun 24, 2019 6:45 pm

Hydromod wrote:
Mon Jun 24, 2019 2:18 am

Daily rebalancing performed best, usually about 1 to 2 percentage points better than the biweekly to quarterly cohorts.

This is an area where a fund might offer a real systematic advantage, if they could efficiently perform the daily rebalancing trades.
Bingo! :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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

Post by jaj2276 » Mon Jun 24, 2019 7:05 pm

Hydromod wrote:
Mon Jun 24, 2019 4:18 pm
jaj2276 wrote:
Mon Jun 24, 2019 3:40 pm
... deleted ...
I get the same value in the first example.

I get 0.0849 for the second. Sqrt((0.1*0.6)^2 + (0.15*0.4)^2).
Yes, I got 0.0849 as well (I missed a significant 0).

Ok that makes me feel better that I at least understand the math. I was worried because the vols were different, the correlations were different, and the portfolio vol was way off from the "target vol" of 15 to 18 that was being discussed. In fact it was way off from the 12 vol portfolio that the historical RP portfolio was suggesting.

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

Post by MotoTrojan » Mon Jun 24, 2019 7:19 pm

hdas wrote:
Mon Jun 24, 2019 6:45 pm
Hydromod wrote:
Mon Jun 24, 2019 2:18 am

Daily rebalancing performed best, usually about 1 to 2 percentage points better than the biweekly to quarterly cohorts.

This is an area where a fund might offer a real systematic advantage, if they could efficiently perform the daily rebalancing trades.
Bingo! :greedy
What would keep me from doing this daily in my Roth (not planning to, but bi-weekly isn’t egregious)?

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

Post by 305pelusa » Mon Jun 24, 2019 7:19 pm

jaj2276 wrote:
Mon Jun 24, 2019 3:40 pm
I'm wondering if someone can help me out. The talk of the variants of the naive risk parity portfolio made me want to look a bit further into the details of my portfolio.

If I take the data from July 30 2002 for SPY and TLT, I get annualized volatility of 0.184 and 0.132. The correlation is -0.405.

If I try to find the portfolio volatility of a 40/60 portfolio, I get a value of 0.0837. Is this correct? My formula was:

sqrt( 0.4^2*0.184^2 + 0.6^2*0.132^2 + 2*0.4*0.6*-0.405*0.184*0.132)=0.0837

Does that mean my portfolio is an 8.3 vol portfolio?
I don't know. You didn't say what your portfolio is. Presumably 40/60 SPY/TLT?

Also even if it was, no it does not mean you have an 8.35% st. dev portfolio. You have a portfolio that displayed that from 2002 to 2019.

I get that it sounds pedantic but I think it's actually a subtle yet vital point to realize.

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

Post by samsdad » Mon Jun 24, 2019 10:13 pm

MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
hdas wrote:
Mon Jun 24, 2019 6:45 pm
Hydromod wrote:
Mon Jun 24, 2019 2:18 am

Daily rebalancing performed best, usually about 1 to 2 percentage points better than the biweekly to quarterly cohorts.

This is an area where a fund might offer a real systematic advantage, if they could efficiently perform the daily rebalancing trades.
Bingo! :greedy
What would keep me from doing this daily in my Roth (not planning to, but bi-weekly isn’t egregious)?
Are you going to run into settlement issues?

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

Post by MotoTrojan » Mon Jun 24, 2019 10:20 pm

samsdad wrote:
Mon Jun 24, 2019 10:13 pm
MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
hdas wrote:
Mon Jun 24, 2019 6:45 pm
Hydromod wrote:
Mon Jun 24, 2019 2:18 am

Daily rebalancing performed best, usually about 1 to 2 percentage points better than the biweekly to quarterly cohorts.

This is an area where a fund might offer a real systematic advantage, if they could efficiently perform the daily rebalancing trades.
Bingo! :greedy
What would keep me from doing this daily in my Roth (not planning to, but bi-weekly isn’t egregious)?
Are you going to run into settlement issues?
Good point there.

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

Post by hdas » Mon Jun 24, 2019 10:23 pm

MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
What would keep me from doing this daily in my Roth ?
The vig you pay associated with the atrocious rebalance scheme that M1 employs.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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

Post by MotoTrojan » Mon Jun 24, 2019 10:37 pm

hdas wrote:
Mon Jun 24, 2019 10:23 pm
MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
What would keep me from doing this daily in my Roth ?
The vig you pay associated with the atrocious rebalance scheme that M1 employs.
Vig? More info on this atrocious scheme?

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

Post by tmax » Mon Jun 24, 2019 10:52 pm

I've seen multiple people mention TQQQ and how it would be a bad investment during recessions.. So I went ahead and created a simulated dataset that goes back to 1994. Figured, I'd post the results here for anyone that is interested.



MAR 1994 - JAN 2019

Portfolio Returns

Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation

60/40 TQQQ/TMF $10,000 $6,061,003 29.32% 43.17% 268.60% -52.24% -86.37% 0.75 1.37 0.68

40/60 TQQQ/TMF $10,000 $4,392,735 27.66% 34.27% 168.12% -34.42% -64.10% 0.81 1.55 0.52

40/60 UPRO/TMF $10,000 $526,404 17.24% 23.42% 105.60% -17.80% -38.73% 0.70 1.15 0.48

Vanguard 500 Index $10,000 $91,887 9.31% 14.52% 37.45% -37.02% -50.97% 0.53 0.76 0.99



As you can see, the insane run on dot.com stocks in 1998-2000 inflated your portfolio gains and re-balancing to TMF protected the majority of them from being wiped out. Even with a 99% loss in TQQQ, neither a 60/40 nor 40/60 portfolio would ever come close to dropping down to the balance level of the UPRO or Vanguard portfolio.

When you look at the worst case scenario, say you invested at the peak of the dot.com bubble:



JAN 2000 - JAN 2019

Portfolio Returns

Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation

60/40 TQQQ/TMF $10,000 $132,074 14.48% 34.94% 106.30% -52.24% -86.37% 0.52 0.79 0.68

40/60 TQQQ/TMF $10,000 $208,416 17.25% 27.97% 73.62% -34.42% -64.10% 0.65 1.07 0.43

40/60 UPRO/TMF $10,000 $128,890 14.33% 22.88% 68.60% -17.59% -38.73% 0.63 1.04 0.38

Vanguard 500 Invest $10,000 $26,076 5.15% 14.60% 32.18% -37.02% -50.97% 0.31 0.43 0.99



JAN 2003 - JAN 2019

Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation

60/40 TQQQ/TMF $10,000 $634,525 29.44% 30.76% 106.30% -27.76% -58.73% 0.96 1.65 0.73

40/60 TQQQ/TMF $10,000 $367,086 25.11% 26.01% 73.62% -14.50% -42.45% 0.95 1.71 0.46

40/60 UPRO/TMF $10,000 $137,165 17.68% 23.26% 68.60% -17.38% -38.73% 0.77 1.27 0.38

Vanguard 500 Inv. $10,000 $41,861 9.31% 13.47% 32.18% -37.02% -50.97% 0.64 0.94 1.00



Thoughts?

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

Post by alpenglow » Tue Jun 25, 2019 7:33 am

MotoTrojan wrote:
Mon Jun 24, 2019 10:37 pm
hdas wrote:
Mon Jun 24, 2019 10:23 pm
MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
What would keep me from doing this daily in my Roth ?
The vig you pay associated with the atrocious rebalance scheme that M1 employs.
Vig? More info on this atrocious scheme?
Vig is from a Yiddish term referring to a bookie's charge on bets or interest on a loan shark's loan (cue The Sopranos). In this case I guess he is referring to the cost of rebalancing.

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

Post by samsdad » Tue Jun 25, 2019 8:22 am

hdas wrote:
Mon Jun 24, 2019 10:23 pm
MotoTrojan wrote:
Mon Jun 24, 2019 7:19 pm
What would keep me from doing this daily in my Roth ?
The vig you pay associated with the atrocious rebalance scheme that M1 employs.
Hdas,

Could you elaborate on the issue as you see it with how M1 employs rebalancing?

By way of disclosure, I’m using Fidelity, but am interested in learning more about M1 and whether it’d be smarter to use them instead of paying the commissions that I’m incurring quarterly.

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

Post by hdas » Tue Jun 25, 2019 10:29 am

MotoTrojan wrote:
Mon Jun 24, 2019 10:37 pm

Vig? More info on this atrocious scheme?
samsdad wrote:
Tue Jun 25, 2019 8:22 am

Hdas,

Could you elaborate on the issue as you see it with how M1 employs rebalancing?

By way of disclosure, I’m using Fidelity, but am interested in learning more about M1 and whether it’d be smarter to use them instead of paying the commissions that I’m incurring quarterly.
It's all encapsulated here:
The trading window is the window of time each weekday when M1 makes all trades for user accounts. M1's trading window benefits users because it helps keep M1's management fees low since M1 is only trading one time per day. M1 is a long term investing vehicle, not a trading platform, so timing of trades is less important.

M1's trading window begins at 9am CT everyday the NYSE market is open and runs until all orders have been completed. All changes to your portfolio made before 9am CT on days that the NYSE is open are generally executed the same day during M1's trading window. Accounts trading will see updates after the trading window has closed for the day.
For Mr. Samsad:

The cost of M1's Vig will be replaced for the cost of you finding the appropriate rebalancing threshold and frequency or the cost of commissions paid to Fidelity. You have to be facile with granular data to figure out your best path.

Good Luck :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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

Post by BigMoneyNoWhammies » Tue Jun 25, 2019 11:52 am

finite_difference wrote:
Sun Mar 10, 2019 12:44 pm
pezblanco wrote:
Tue Mar 05, 2019 10:43 pm
privatefarmer wrote:
Tue Mar 05, 2019 10:31 pm
One more data point, from April ‘08-present the fed fund rate has gone sideways, it started at 2.3% and currently at 2.4%. Our combo portfolio would’ve returned 18.6% CAGR, TMF returned 8.7% and VFINX 9%. So clearly In sideways markets this strategy has worked wonderfully.
So, the bull market in stocks that time saved the bacon ..... I admit that the beauty of the strategy is that if one leg (stocks) or the other leg (bonds) does well, then you're golden. I've just been pointing out that I think that the expectations that the bond leg is going to save your bacon in the future might be misplaced. I expect that it might very well give reasonable returns but ... great returns? I don't see how that could reasonably be something to bet on.
Right now rates are not very high. So if there’s a bear market there’s not much wiggle room. What will happen if treasury rates go negative? They almost did after the Great Recession. I wouldn’t expect the stock market to “save the bacon” in that type of scenario, or for stocks and treasury rates to be uncorrelated?

That is, would investors dump treasuries to see positive or 0% return elsewhere or can we expect them to pay to keep their money in treasuries?

Note: I think volatility, suppressed returns, fees, weaker correlation than expected, etc. as more of a risk than this scenario but I still think it’s worth considering.
The Fed has been adamant since the Recession that they would never do treasury instruments with negative rates like some of the European countries and japan have done. Don't expect that to change. They see it as foolish and so do most in the financial world within the US. Investors here would never be ok with locking in long term losses via negative long treasuries.

Kbg
Posts: 15
Joined: Thu Mar 23, 2017 11:33 am

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

Post by Kbg » Tue Jun 25, 2019 11:20 pm

Another implementation idea...set up a DIY index annuity using UPRO and zero coupon treasuries.

This will eliminate any chance of any (nominal) capital loss, at the expense of returns of course.

Ladder the zeros quarterly so as to minimize timing risk and enable preservation of earned capital gains by quarterly investments into the stock component and new zeros (or just let the stock component run...not super appealing with a single 3x ETF however).

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