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

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

Post by MotoTrojan »

mickens16 wrote: Sat Jul 20, 2019 8:03 pm Can one of you fine people explain how you go about doing the 20-day look back?

Thanks!
Take the volatility/stdev of each holding from the last 20 days and adjust the allocation for risk-parity (stdev1 x allocation 1 = stdev2 x allocation2). You can calculate this yourself or use portfolio visualizer. Do this monthly, or use a longer rebalance period and number of days.

Be ready for drastic changes in allocation.
schismal
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by schismal »

MotoTrojan wrote: Sat Jul 20, 2019 7:07 pm You're welcome! I mentioned this before but I don't think there is a significant boost from the correlation differences between IEF & LTT/TMF so I actually do not see much value in using IEF unless you go 100%.

For example if you wanted to emulate the 40/30/30 UPRO/TMF/IEF using TMF & long-treasuries (VUSTX) you could do 40/22/38 UPRO/TMF/VUSTX; I arrived at these weights by simply using the volatility of the funds since 1992 (data available for all funds) and adjusting the weight of TMF/VUSTX to equal the volatility of 50/50 TMF/IEF.

The 40/30/30 w/ IEF had a CAGR of 11.83% from 1955-2018 w/ 24.70% Stdev.

The 40/22/38 w/ VUSTX and less TMF had a CAGR of 11.77% w/ 24.30% Stdev; the rest of the stats were quite similar as well.

I'd feel more comfortable with the 2nd portfolio as it holds less of TMF, which is more of a wildcard (issues tracking index, borrowing costs, volatility decay, etc...) and the returns/risk are quite similar between the two regardless of environment.

I think the real key is to pick a duration risk-exposure you are comfortable with and then use the funds to achieve that with as little TMF as possible (40/60 UPRO/EDV is close to the above portfolios for example w/ slightly more duration risk).
I agree there's not any significant correlation difference between IEF and EDV -- their correlation is about 0.86 over the past decade according to PV. But that's not really the point. EDV is far more volatile, with a 20% standard deviation compared to 6% for IEF. If the goal of including one of these non-leveraged treasury funds is to reduce the volatility of TMF while maintaining its anticorrelation with UPRO, then EDV does that to some degree, and IEF does it more. TMF, EDV, and IEF all tend to move together, so the question is how much TMF exposure do you want, and would you rather dilute it with a more volatile LTT for higher returns, or a less volatile ITT for a more stable ride. IMO, both are good options. (The 22/38 TMF/VUSTX split is an interesting way to get to less TMF, will look into that option as well.)
MotoTrojan wrote: Sat Jul 20, 2019 7:11 pm I did want to make sure this was crystal clear though; the UPRO/TMF case shown is the OP's quarterly rebalance of 40/60 while the other two use the 1-month look-back. In my earlier post I showed the UPRO/TMF w/ 1-month look-back and it also has great efficiency and the best of any returns; the main thing that adding IEF or EDV does is reduce overall risk-exposure/leverage (and boost returns in 1955-1982 due to less drag).
Got it.

I think I'll use the original 40/60 approach with monthly lookbacks in my Roth, because rebalancing is simple and free. But I'm also setting up a small portion of my taxable account with this strategy, and I'm considering diluting TMF with another treasury fund to dampen the volatility there -- I'm looking at both IEF and EDV for that account. I've toyed with adding a gold fund, but that option has been very... inconsistent.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

no simpler wrote: Tue Jul 16, 2019 4:08 pm https://retirementresearcher.com/good-v ... latility/
VIX explains 80% of variance in future vol, vs only 50% based on using historical (lookback) vol. So better just to use the VIX than a lookback window.

TYVIX would give you 10 yr interest rate volatility:
http://www.cboe.com/products/vix-index- ... rest-rates

It just makes intuitive sense that these indices would be more predictive than a simple lookback model we can easily cook up. The indices reflect all participants' knowledge and the equilibrium of far more sophisticated strategies competing against each other.
Interesting theory. This is the first time I've heard about it.

Do you have any backtests showing that using VIX and TYVIX as volatility measures improve risk adjusted returns?
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

Does anyone have datasets for intermediate term treasuries, as far back as possible, and gold as far back as possible?

Gold only going to 2004 really limits the backtests.
schismal
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by schismal »

coingaroo wrote: Sun Jul 21, 2019 7:11 am
no simpler wrote: Tue Jul 16, 2019 4:08 pm https://retirementresearcher.com/good-v ... latility/
VIX explains 80% of variance in future vol, vs only 50% based on using historical (lookback) vol. So better just to use the VIX than a lookback window.

TYVIX would give you 10 yr interest rate volatility:
http://www.cboe.com/products/vix-index- ... rest-rates

It just makes intuitive sense that these indices would be more predictive than a simple lookback model we can easily cook up. The indices reflect all participants' knowledge and the equilibrium of far more sophisticated strategies competing against each other.
Interesting theory. This is the first time I've heard about it.

Do you have any backtests showing that using VIX and TYVIX as volatility measures improve risk adjusted returns?
A similar approach has been backtested before, with quite good results.

http://www.the-lazy-trader.com/2017/12/ ... art-4.html
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

coingaroo wrote: Sun Jul 21, 2019 8:14 am Does anyone have datasets for intermediate term treasuries, as far back as possible, and gold as far back as possible?
Posted here: viewtopic.php?p=4425650#p4426315

https://drive.google.com/file/d/16ORudK ... 0FggA/view

Can download into Excel, or copy to your Google Drive and edit online with Google's spreadsheet editor.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

schismal wrote: Sun Jul 21, 2019 6:12 am
MotoTrojan wrote: Sat Jul 20, 2019 7:07 pm
I think the real key is to pick a duration risk-exposure you are comfortable with and then use the funds to achieve that with as little TMF as possible (40/60 UPRO/EDV is close to the above portfolios for example w/ slightly more duration risk).
I agree there's not any significant correlation difference between IEF and EDV -- their correlation is about 0.86 over the past decade according to PV. But that's not really the point. EDV is far more volatile, with a 20% standard deviation compared to 6% for IEF. If the goal of including one of these non-leveraged treasury funds is to reduce the volatility of TMF while maintaining its anticorrelation with UPRO, then EDV does that to some degree, and IEF does it more. TMF, EDV, and IEF all tend to move together, so the question is how much TMF exposure do you want, and would you rather dilute it with a more volatile LTT for higher returns, or a less volatile ITT for a more stable ride. IMO, both are good options. (The 22/38 TMF/VUSTX split is an interesting way to get to less TMF, will look into that option as well.)
I am stating that it is actually preferred to use the more volatile LTT (or EDV) rather than IEF, as it allows you to use less TMF and maintain the same expected return (not more). Now if you are trying to achieve a blended bond-side that is close to the volatility of 100% IEF then of course you'll need mostly IEF, but to use my above example if you were comfortable with 50/50 TMF & IEF then I would argue you're far better off with 22/38 TMF/VUSTX (or even just pure EDV which is close as well). The stability of the ride is expected to be quite close, but you're holding less TMF and have less exposure to any issues with the fund itself.

To summarize, the bond fund(s) you use don't really matter much at all, it is the weighted average volatility (duration-sensitivity) that matters, and if you have any TMF included at all you're best off using longer duration unleveraged funds as much as possible to reduce or even eliminate the TMF entirely, rather than holding more TMF along with IEF.

The results of 40/60 UPRO/IEF are somewhat attractive though, even if far from true risk-parity. My latest fun-experiment is to take 5 different risk-parity portfolios w/ different bond volatility (UPRO exposures of 25%, 29%, 32%, 36%, and 37.5%) and then add additional UPRO to achieve 40% exposure. Will be interesting to see if there is a sweet-spot here historically between maintaining enough bond-exposure to help in downturns but skewing away enough to maintain a reasonable return in the rising rate period.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

Those who want to diversify internationally may want to consider PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) via PISIX (institutional), PIUHX (more expensive institutional), or PIPAX (class A shares). Alternatively, they may want to consider PIMCO StocksPLUS® International Fund (Unhedged). Here's a chart of PIPAX, the class A shares fund that has dollar hedging.

Image

It seems better than EFA (same index ETF) if you're comfortable with PIMCO and with using leverage to add bond exposure on top of equities. Its index doesn't have Canada, like VEA (all developed ex-US) or VXUS does (all world ex-US), but it's surely better returns to get Canada exposure separately if wanted.

Portfolio 1 is the currency hedged PIMCO fund, 2 is the unhedged PIMCO fund, and 3 is EFA.

Image

What I love about these strategies is that you don't have to wait around for a tilt to an academic factor to finally possibly swing around over 30 years. You get to see better returns in most years. You just need to be prudent when using leverage, but these PIMCO funds seem to be well designed from a risk perspective, for those already comfortable with equity exposure.

I'm going to use PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) for my international developed allocation. The currency hedging seems fairly cheap and reduces volatility & the risk of max drawdown, which seems very important to me when leverage is involved. I will need a separate allocation for emerging markets or Canada.

These should probably be held in tax-advantaged accounts, given the high yield.
schismal
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by schismal »

MotoTrojan wrote: Sun Jul 21, 2019 11:36 am I am stating that it is actually preferred to use the more volatile LTT (or EDV) rather than IEF, as it allows you to use less TMF and maintain the same expected return (not more). Now if you are trying to achieve a blended bond-side that is close to the volatility of 100% IEF then of course you'll need mostly IEF, but to use my above example if you were comfortable with 50/50 TMF & IEF then I would argue you're far better off with 22/38 TMF/VUSTX (or even just pure EDV which is close as well). The stability of the ride is expected to be quite close, but you're holding less TMF and have less exposure to any issues with the fund itself.

To summarize, the bond fund(s) you use don't really matter much at all, it is the weighted average volatility (duration-sensitivity) that matters, and if you have any TMF included at all you're best off using longer duration unleveraged funds as much as possible to reduce or even eliminate the TMF entirely, rather than holding more TMF along with IEF.

The results of 40/60 UPRO/IEF are somewhat attractive though, even if far from true risk-parity. My latest fun-experiment is to take 5 different risk-parity portfolios w/ different bond volatility (UPRO exposures of 25%, 29%, 32%, 36%, and 37.5%) and then add additional UPRO to achieve 40% exposure. Will be interesting to see if there is a sweet-spot here historically between maintaining enough bond-exposure to help in downturns but skewing away enough to maintain a reasonable return in the rising rate period.
Now that I've done some more modeling, I agree that EDV is a strong option for this reason. 40/60 UPRO/EDV and 40/10/50 UPRO/TMF/EDV both look to be very efficient in terms of risk. Good tip!
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by no simpler »

duplicated - train wifi
Last edited by no simpler on Sun Jul 21, 2019 1:32 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by no simpler »

coingaroo wrote: Sun Jul 21, 2019 7:11 am
no simpler wrote: Tue Jul 16, 2019 4:08 pm https://retirementresearcher.com/good-v ... latility/
VIX explains 80% of variance in future vol, vs only 50% based on using historical (lookback) vol. So better just to use the VIX than a lookback window.

TYVIX would give you 10 yr interest rate volatility:
http://www.cboe.com/products/vix-index- ... rest-rates

It just makes intuitive sense that these indices would be more predictive than a simple lookback model we can easily cook up. The indices reflect all participants' knowledge and the equilibrium of far more sophisticated strategies competing against each other.
Interesting theory. This is the first time I've heard about it.

Do you have any backtests showing that using VIX and TYVIX as volatility measures improve risk adjusted returns?
Better vol predictions would improve risk-adjusted returns of a levered strategy almost by definition if you're committed to regular rebalancing. As a thought experiment, if you could perfectly predict volatility, you'd be able to move out of an asset entirely when vol was going to be high enough to lead to a loss with near certainty, and lever up with confidence when you knew vol was going to be very low. It should be noted that vol doesn't correlate with market direction - you'd want to reduce leverage but still remain exposed to market when predicted vol is high (think move out of 3x ETF to regular 1x ETF).

This paper concretely defines the loss from both variance drag, as well as unwanted negative covariance between leverage and return:
https://riskcenter.berkeley.edu/wp-cont ... r1_000.pdf. So the higher the realized variance of a levered strategy, the higher the variance drag, and thus the lower the geometric return.

Now all that said, with further research, it turns out VIX isn't necessarily the best way to predict future volatility. VIX tends to overestimate volatility, since it bakes in a lot of other risks as well. The options market is more useful for getting implied vol of individual securities, but not the best for aggregating into a single vol measure for a whole index. But historical vol is also nowhere near the best model. This means there is real opportunity for data science to add value by building better predictive models. Here is a good overview of existing vol prediction approaches: https://www.lazardassetmanagement.com/d ... rch_en.pdf
Last edited by no simpler on Sun Jul 21, 2019 3:05 pm, edited 2 times in total.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

PIMCO also offers a PRRSX (RealEstateRealReturn Strategy Fund), which gives you exposure to treasury inflation protected securities (TIPS) and real estate investment trusts (REITs). For anyone who feels that TIPS are too boring to hold, an equal side of REITs could just possibly make them interesting. Historically it had higher CAGR than IYR (a US real estate ETF) and VNQ (Vanguard's US real estate ETF).

https://www.portfoliovisualizer.com/bac ... 0&total3=0
schismal
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by schismal »

MoneyMarathon wrote: Sun Jul 21, 2019 12:11 pm Those who want to diversify internationally may want to consider PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) via PISIX (institutional), PIUHX (more expensive institutional), or PIPAX (class A shares). Alternatively, they may want to consider PIMCO StocksPLUS® International Fund (Unhedged).
For anyone curious, my BrokerageLink has PISNX, which is yet another institutional version of this same fund. $50 fee on the required initial investment, and $5 per automatic investment thereafter.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

schismal wrote: Sun Jul 21, 2019 3:30 pm
MoneyMarathon wrote: Sun Jul 21, 2019 12:11 pm Those who want to diversify internationally may want to consider PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) via PISIX (institutional), PIUHX (more expensive institutional), or PIPAX (class A shares). Alternatively, they may want to consider PIMCO StocksPLUS® International Fund (Unhedged).
For anyone curious, my BrokerageLink has PISNX, which is yet another institutional version of this same fund. $50 fee on the required initial investment, and $5 per automatic investment thereafter.
Interesting but still would have underperformed ISCF since inception:

https://www.portfoliovisualizer.com/fun ... hmark=ISCF
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

HEDGEFUNDIE wrote: Sun Jul 21, 2019 3:34 pm
schismal wrote: Sun Jul 21, 2019 3:30 pm
MoneyMarathon wrote: Sun Jul 21, 2019 12:11 pm Those who want to diversify internationally may want to consider PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) via PISIX (institutional), PIUHX (more expensive institutional), or PIPAX (class A shares). Alternatively, they may want to consider PIMCO StocksPLUS® International Fund (Unhedged).
For anyone curious, my BrokerageLink has PISNX, which is yet another institutional version of this same fund. $50 fee on the required initial investment, and $5 per automatic investment thereafter.
Interesting but still would have underperformed ISCF since inception:

https://www.portfoliovisualizer.com/fun ... hmark=ISCF
The logic of this thread is that leverage works. You might win in the short run with unleveraged concentrated positions. So what?
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

MoneyMarathon wrote: Sun Jul 21, 2019 4:18 pm
HEDGEFUNDIE wrote: Sun Jul 21, 2019 3:34 pm
schismal wrote: Sun Jul 21, 2019 3:30 pm
MoneyMarathon wrote: Sun Jul 21, 2019 12:11 pm Those who want to diversify internationally may want to consider PIMCO StocksPLUS® International Fund (U.S. Dollar-Hedged) via PISIX (institutional), PIUHX (more expensive institutional), or PIPAX (class A shares). Alternatively, they may want to consider PIMCO StocksPLUS® International Fund (Unhedged).
For anyone curious, my BrokerageLink has PISNX, which is yet another institutional version of this same fund. $50 fee on the required initial investment, and $5 per automatic investment thereafter.
Interesting but still would have underperformed ISCF since inception:

https://www.portfoliovisualizer.com/fun ... hmark=ISCF
The logic of this thread is that leverage works. You might win in the short run with unleveraged concentrated positions. So what?
So it's still unproven that a leveraged EAFE position offers better risk-adjusted returns than an unleveraged EAFE factor fund.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by JBeck »

Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
I’m still massaging my plan based on the discussion. I still feel intermediate treasuries have no place for me but something like 40/60 UPRO/EDV longterm average target and reset monthly to adjust based on volatility seems like a balance between the two periods (so not a true risk parity, but a target risk-ratio).
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
The discussion is still ongoing. So changing your AA would be premature.

I am really liking 40% UPRO, 40% EDV, 15% TMF, and 5% GLD though. Net 2.6x exposure.

For those willing to sacrifice 3/4th of a percentage in CAGR for 1% less volatility, you could go 40% UPRO, 50% EDV, and 10% GLD. Only net 1.9x exposure but returns are very close. Hello volatility drag (and low fees)!

I am also considering a heavier allocation to gold, commodities, and real estate in order to provide less of a short-inflation factor to this strategy. The following has backtested pretty good:

40% UPRO, 35% EDV, 10% VNQ, 7.5% DBC, 7.5% GLD. 1.9x net exposure
no simpler
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by no simpler »

Another paper worth checking out:

https://papers.ssrn.com/sol3/papers.cfm ... id=1664823

The author devises a formula that explicitly describes the tradeoff between magnification of returns and variance drag from leverage. There is a curvilinear relationship between leverage and returns, with max return generally lying around 2:1 leverage for most markets over very long time ranges. The S&P 500 since 1950 is an outlier in that max return lies around 3:1 leverage - what we've basically discovered in this thread.

The author also makes a similar case as I made previously - that better vol prediction should lead to better returns when using dynamic leverage.
The best strategy would not only change relative weights of asset classes based on vol, but also change the blend of 1, 2, and 3x ETFs to get the desired leverage.
Last edited by no simpler on Mon Jul 22, 2019 9:46 am, edited 2 times in total.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

EfficientInvestor wrote: Wed Jul 10, 2019 10:22 pm
RandomWord wrote: Wed Jul 10, 2019 5:18 pm
robertmcd wrote: Wed Jul 10, 2019 5:06 pm Days like today are what worry me for this strategy, granted your stocks did well, but long term yields went up 3 bps while short term went down 10 bps. Somebody please come out with a leveraged 2 yr treasury ETF so I can run a risk parity strategy with it.
If you're willing to use futures instead of an ETF, the futures market has this covered.

But I'm not sure how much difference it makes in the long term, seems like the sort of thing that flucuates from day to day but overall averages out.
I started implementing the strategy with futures contracts a few weeks ago. I'm using a Roth IRA account that has about $32k in it. I have it spread across 2 contracts of /MES (micro S&P), 1 contract of /ZT (2-year treasuries), and 1 contract of /MGC (micro gold). This roughly equates to a 15/80/5 portfolio leveraged by a factor of 8. I have about $4k that is covering the margin requirements and I keep another $2k or so as cash in order to cover any daily fluctuations. The remaining cash is in MINT (ultra-short term bond ETF) to help offset some of the borrowing cost associated with the futures. The backtest below (since Nov 1991) represents what I'm aiming for. I'm assuming a quarterly rebalance since I will do the rebalance every quarter when I need to roll the futures contracts. In times when I may need 2.5 contracts of /MES or 1.5 contracts of /ZT, I will likely supplement the futures with regular ETFs (SPY, SHY, GLD) in order to hit my target exposures and maintain an 8X 15/80/5 portfolio.

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

This is my first venture into the use of futures, so I'm still learning some of the intricacies. However, my hope is that this will be a better alternative than the leveraged ETFs because it will help me avoid the 1% expense ratios and avoid the volatility drag due to the daily leverage reset. That drag could add up to another 1.5-2% over time. Therefore, I think I could conservatively expect a 2% increase in return per year over using leveraged ETFs. In addition, the futures allow me to use shorter term bonds that help limit my interest rate risk. We shall see how it goes.
Thank you for sharing. Two questions:

What financing rates have you experienced in futures, and what has been the case in the past? I know it is more efficient, but curious how much so.

Secondly, do you receive higher yield from these contracts, as taxable income? Speaking as an Aussie investor, most of leveraged fund returns are reflected the underlying stocks / capital gains, which is really beneficial. The PIMCO fund's high yield makes me wonder if futures is a good strategy in a taxable account.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

coingaroo wrote: Mon Jul 22, 2019 9:29 am
JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
The discussion is still ongoing. So changing your AA would be premature.

I am really liking 40% UPRO, 40% EDV, 15% TMF, and 5% GLD though. Net 2.6x exposure.

For those willing to sacrifice 3/4th of a percentage in CAGR for 1% less volatility, you could go 40% UPRO, 50% EDV, and 10% GLD. Only net 1.9x exposure but returns are very close. Hello volatility drag (and low fees)!

I am also considering a heavier allocation to gold, commodities, and real estate in order to provide less of a short-inflation factor to this strategy. The following has backtested pretty good:

40% UPRO, 35% EDV, 10% VNQ, 7.5% DBC, 7.5% GLD. 1.9x net exposure
Speaking in net exposure would seem more applicable if you were maintaining parity (not 40% UPRO), but there does seem to be merit to skewing some risk back towards equities if worried about rising rate periods.
EfficientInvestor
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor »

coingaroo wrote: Mon Jul 22, 2019 9:42 am
EfficientInvestor wrote: Wed Jul 10, 2019 10:22 pm
RandomWord wrote: Wed Jul 10, 2019 5:18 pm
robertmcd wrote: Wed Jul 10, 2019 5:06 pm Days like today are what worry me for this strategy, granted your stocks did well, but long term yields went up 3 bps while short term went down 10 bps. Somebody please come out with a leveraged 2 yr treasury ETF so I can run a risk parity strategy with it.
If you're willing to use futures instead of an ETF, the futures market has this covered.

But I'm not sure how much difference it makes in the long term, seems like the sort of thing that flucuates from day to day but overall averages out.
I started implementing the strategy with futures contracts a few weeks ago. I'm using a Roth IRA account that has about $32k in it. I have it spread across 2 contracts of /MES (micro S&P), 1 contract of /ZT (2-year treasuries), and 1 contract of /MGC (micro gold). This roughly equates to a 15/80/5 portfolio leveraged by a factor of 8. I have about $4k that is covering the margin requirements and I keep another $2k or so as cash in order to cover any daily fluctuations. The remaining cash is in MINT (ultra-short term bond ETF) to help offset some of the borrowing cost associated with the futures. The backtest below (since Nov 1991) represents what I'm aiming for. I'm assuming a quarterly rebalance since I will do the rebalance every quarter when I need to roll the futures contracts. In times when I may need 2.5 contracts of /MES or 1.5 contracts of /ZT, I will likely supplement the futures with regular ETFs (SPY, SHY, GLD) in order to hit my target exposures and maintain an 8X 15/80/5 portfolio.

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

This is my first venture into the use of futures, so I'm still learning some of the intricacies. However, my hope is that this will be a better alternative than the leveraged ETFs because it will help me avoid the 1% expense ratios and avoid the volatility drag due to the daily leverage reset. That drag could add up to another 1.5-2% over time. Therefore, I think I could conservatively expect a 2% increase in return per year over using leveraged ETFs. In addition, the futures allow me to use shorter term bonds that help limit my interest rate risk. We shall see how it goes.
Thank you for sharing. Two questions:

What financing rates have you experienced in futures, and what has been the case in the past? I know it is more efficient, but curious how much so.

Secondly, do you receive higher yield from these contracts, as taxable income? Speaking as an Aussie investor, most of leveraged fund returns are reflected the underlying stocks / capital gains, which is really beneficial. The PIMCO fund's high yield makes me wonder if futures is a good strategy in a taxable account.
The answer to both questions lies in understanding the pricing of futures. See the wiki page at the link below. The future price takes into account the risk-free interest rate (LIBOR rate) and the assumed dividends to be paid over the life of the contract. The risk-free rate increases the futures price and the assumed dividends decreases the price. Since you are credited with the dividends at the time of purchase via a lower price, you don't actually receive the dividend yield. However, in the US, futures are taxed at a long term capital gains rate for 60% of it and short term capital gains rate for the other 40%. Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
RandomWord
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by RandomWord »

EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor »

RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
They are definitely very thinly traded that far out and that far in the money. The further you go in the money, the less premium you have to pay for the extrinsic value. However, the bid/ask spread gets wider and you lose out that way instead. Finding the right balance is probably a case by case basis. Either way, you could offset these additional costs by selling shorter term out of the money calls against your long positions. However, in order to not fully cap your upside, never sell more than one contract short for every 2 contracts long. Overall, try to at least sell enough short contracts so that you are theta neutral. The strategy would be far from passive due to needing to manage the short options on a month to month (or even week to week) basis.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by RandomWord »

EfficientInvestor wrote: Mon Jul 22, 2019 11:48 am
RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
They are definitely very thinly traded that far out and that far in the money. The further you go in the money, the less premium you have to pay for the extrinsic value. However, the bid/ask spread gets wider and you lose out that way instead. Finding the right balance is probably a case by case basis. Either way, you could offset these additional costs by selling shorter term out of the money calls against your long positions. However, in order to not fully cap your upside, never sell more than one contract short for every 2 contracts long. Overall, try to at least sell enough short contracts so that you are theta neutral. The strategy would be far from passive due to needing to manage the short options on a month to month (or even week to week) basis.
Yeah, that sounds like an interesting strategy, but also pretty different from the simple, passive strategy that we started with. I'd be worried that I had missed some detail in the options pricing and it would blow up catastrophically, even while basic stocks and bonds were doing fine.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by columbia »

Back to that Pimco fund, PSLDX:

25% PSLDX/75% intermediate treasuries has been pretty impressive vs 50% S&P 500/50% intermediate treasuries. Especially in 2008.
no simpler
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by no simpler »

Where are you guys getting the daily returns for S&P going back to the 50's, along with the simulated LETF returns?
Can someone point me to the google drive file. I found the one with annual returns, but I'd like to contribute by analyzing the daily returns.

Any help is super appreciated.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading »

RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
It's not a good idea in theory either. The problem is that part of the cost of a call is the downside protection that you don't get with futures/long stocks. Buying a call will create a position with a positive Vega, which means you profit from volatility. It will also have a positive theta (you lose money as time goes by and the option decays). Plus, if it's not deep in the money enough, the Delta might not even be 1 any ways.

Long story short, you will end up paying more in costs to get things that you might not desire. Plus, it might not even mimic stock movement one to one.

You can mitigate this by selling puts as well. Theoretically, if you can sell a put that offsets your theta, Vega and brings the entire position's Delta to 1, it will be essentially identical to the futures position. In practice, I've had issues finding these because lately SPY has volatility skewness. Even if you got it right at first, things will change as time goes on and the position might develop positions on time decay and volatility once again.

These problems arise because the options can be exercises earlier (they are not European). That makes a lot of the "nice" theoretical properties go away somewhat.

If all of this sounds foreign, I'd stay away from mimicking the positions with options. I've taken some time to analyze it in the following thread (last two pages). I'm convinced it's doable and potentially worthwhile even over futures themselves (and over LETFs, which carry the high fees), but I think you need to know what you're doing to some extent:
viewtopic.php?f=10&t=274390&start=150
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

no simpler wrote: Mon Jul 22, 2019 2:16 pm Where are you guys getting the daily returns for S&P going back to the 50's, along with the simulated LETF returns?
Can someone point me to the google drive file. I found the one with annual returns, but I'd like to contribute by analyzing the daily returns.

Any help is super appreciated.
Daily doesn’t exist that far back but there’s a magic formula that discussed how monthly volatility was used to get the monthly leveraged returns. Siamond’s thread has a lot more.

I look forward to your analysis!
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by PluckyDucky »

305pelusa wrote: Mon Jul 22, 2019 2:29 pm ...
These problems arise because the options can be exercises earlier (they are not European). That makes a lot of the "nice" theoretical properties go away somewhat.

If all of this sounds foreign, I'd stay away from mimicking the positions with options. I've taken some time to analyze it in the following thread (last two pages). I'm convinced it's doable and potentially worthwhile even over futures themselves (and over LETFs, which carry the high fees), but I think you need to know what you're doing to some extent:
viewtopic.php?f=10&t=274390&start=150
Aren't SPX options cash-settled european style?

How far back do we have data on option pricing? Or is there some way to backtest this?
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by RandomWord »

305pelusa wrote: Mon Jul 22, 2019 2:29 pm
RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
It's not a good idea in theory either.

{snip}

If all of this sounds foreign, I'd stay away from mimicking the positions with options. I've taken some time to analyze it in the following thread (last two pages). I'm convinced it's doable and potentially worthwhile even over futures themselves (and over LETFs, which carry the high fees), but I think you need to know what you're doing to some extent:
viewtopic.php?f=10&t=274390&start=150
Thanks 305pelusa, that's really helpful. I appreciate you taking the time to explain the options lingo. Looks like I've got some studying to do (although I will probably end up avoiding options, just because it sounds complicated and scary to me).
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

no simpler wrote: Mon Jul 22, 2019 9:39 amThere is a curvilinear relationship between leverage and returns, with max return generally lying around 2:1 leverage for most markets over very long time ranges. The S&P 500 since 1950 is an outlier in that max return lies around 3:1 leverage - what we've basically discovered in this thread.
This is with the leveraged ETF by itself, the 3:1 here would be equivalent to 100% UPRO.

The discussion has centered around 40% to 60% UPRO, mostly, or 1.2x to 1.8x, which is conservatively under a 2:1 leverage optimum. Also we've been able to sim better results than that optimum in backtests by considering other, less-correlated assets and rebalancing.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor »

305pelusa wrote: Mon Jul 22, 2019 2:29 pm
RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
It's not a good idea in theory either. The problem is that part of the cost of a call is the downside protection that you don't get with futures/long stocks. Buying a call will create a position with a positive Vega, which means you profit from volatility. It will also have a positive theta (you lose money as time goes by and the option decays). Plus, if it's not deep in the money enough, the Delta might not even be 1 any ways.

Long story short, you will end up paying more in costs to get things that you might not desire. Plus, it might not even mimic stock movement one to one.

You can mitigate this by selling puts as well. Theoretically, if you can sell a put that offsets your theta, Vega and brings the entire position's Delta to 1, it will be essentially identical to the futures position. In practice, I've had issues finding these because lately SPY has volatility skewness. Even if you got it right at first, things will change as time goes on and the position might develop positions on time decay and volatility once again.

These problems arise because the options can be exercises earlier (they are not European). That makes a lot of the "nice" theoretical properties go away somewhat.

If all of this sounds foreign, I'd stay away from mimicking the positions with options. I've taken some time to analyze it in the following thread (last two pages). I'm convinced it's doable and potentially worthwhile even over futures themselves (and over LETFs, which carry the high fees), but I think you need to know what you're doing to some extent:
viewtopic.php?f=10&t=274390&start=150
I have read your other thread and have been meaning to ask this question...where do you factor in the margin you have to put up to sell the naked put? I believe you mention somewhere in your thread that it doesn't make sense to use your strategy in a retirement account because you have to fully secure the put position with cash. So in your margin account, are you taking into account the margin needed to secure the put? Are you having to pay broker rates for that margin?
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading »

EfficientInvestor wrote: Mon Jul 22, 2019 3:59 pm
305pelusa wrote: Mon Jul 22, 2019 2:29 pm
RandomWord wrote: Mon Jul 22, 2019 11:24 am
EfficientInvestor wrote: Mon Jul 22, 2019 11:17 am Due to this, there are other products that may be better to use in a taxable account such as call options with more than 1 year remaining to expiration. That way, you can hold for longer than 365 days and get 100% long term capital gains.

https://en.wikipedia.org/wiki/Cost_of_carry
I'd like to know more about how you'd implement this with options. It sounds like a good idea in theory, but I'm not sure about the practical details. When I look up long-term SPY options (eg, https://finance.yahoo.com/quote/SPY/opt ... 1600387200 for September 2020), they seem very thinly traded. I think you'd lose a lot on the spread, trying to trade those. It would also be hard to keep your leverage manageable, since the effective leverage would change as the price changes.
It's not a good idea in theory either. The problem is that part of the cost of a call is the downside protection that you don't get with futures/long stocks. Buying a call will create a position with a positive Vega, which means you profit from volatility. It will also have a positive theta (you lose money as time goes by and the option decays). Plus, if it's not deep in the money enough, the Delta might not even be 1 any ways.

Long story short, you will end up paying more in costs to get things that you might not desire. Plus, it might not even mimic stock movement one to one.

You can mitigate this by selling puts as well. Theoretically, if you can sell a put that offsets your theta, Vega and brings the entire position's Delta to 1, it will be essentially identical to the futures position. In practice, I've had issues finding these because lately SPY has volatility skewness. Even if you got it right at first, things will change as time goes on and the position might develop positions on time decay and volatility once again.

These problems arise because the options can be exercises earlier (they are not European). That makes a lot of the "nice" theoretical properties go away somewhat.

If all of this sounds foreign, I'd stay away from mimicking the positions with options. I've taken some time to analyze it in the following thread (last two pages). I'm convinced it's doable and potentially worthwhile even over futures themselves (and over LETFs, which carry the high fees), but I think you need to know what you're doing to some extent:
viewtopic.php?f=10&t=274390&start=150
I have read your other thread and have been meaning to ask this question...where do you factor in the margin you have to put up to sell the naked put? I believe you mention somewhere in your thread that it doesn't make sense to use your strategy in a retirement account because you have to fully secure the put position with cash. So in your margin account, are you taking into account the margin needed to secure the put? Are you having to pay broker rates for that margin?
I can't get leverage if I have to secure every dollar of the put with my own dollars. At that point I would just buy the underlying security and be done with it haha.

The lower the margin requirements, the higher the levels of leverage you can obtain. Futures have low margin requirements, which allows for higher levels of leverage for a given amount of funds.

Because I am only interested in leveraging in the 1-2.5 range, the amount of collateral in my account is high enough that a margin call is somewhat unlikely with the options or the futures. So I don't even factor in the margin requirements of the puts. If you're only using them for 1-2 x leverage, it's just really hard to get a margin call.

As to your second question, you might be suffering from the unfortunate problem that the word "margin" has two completely different meanings. Margin could mean borrowing money from a broker to buy more things (where you would pay a rate for the borrowed funds). It also means the collateral ("margin requirement") for options and futures. As long as I meet the margin requirements (collateral) for my positions, I don't pay a cent for anything because I am not borrowing anything.

Does that kinda make sense?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

coingaroo wrote: Mon Jul 22, 2019 9:29 am
JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
The discussion is still ongoing. So changing your AA would be premature.

I am really liking 40% UPRO, 40% EDV, 15% TMF, and 5% GLD though. Net 2.6x exposure.

For those willing to sacrifice 3/4th of a percentage in CAGR for 1% less volatility, you could go 40% UPRO, 50% EDV, and 10% GLD. Only net 1.9x exposure but returns are very close. Hello volatility drag (and low fees)!

I am also considering a heavier allocation to gold, commodities, and real estate in order to provide less of a short-inflation factor to this strategy. The following has backtested pretty good:

40% UPRO, 35% EDV, 10% VNQ, 7.5% DBC, 7.5% GLD. 1.9x net exposure
The 40% UPRO, 60% EDV (not interested in gold etc...) is looking like a good compromise between the 1955-1982 and 1982-present periods. I would like to incorporate 1-month look-back volatility still and the easiest way to achieve that seems to be knocking down the UPRO volatility by 33.3% (multiply it by 0.667) and then getting parity with that value and EDV's true volatility, achieving 40/60 average exposure long-term. Only drawback here is that it will have the same sort of absolute swings in UPRO allocation as the original 40/60 UPRO/TMF portfolio, which can be quite extreme (low 80% allocations occasionally, under very calm markets). I may put a cap on that to keep things more manageable, perhaps at the highest historical UPRO allocation under a proper UPRO/EDV parity portfolio.

Sorry Direxion, looks like I won't be a long-term holder of TMF after all!
Last edited by MotoTrojan on Mon Jul 22, 2019 9:17 pm, edited 1 time in total.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

Emerging markets worked surprisingly well here. Much better than I expected for 1976-2018.

Image

Portfolio 1 is 30% UPRO, 30% TMF, 40% VWO.
Portfolio 2 is 30% UPRO, 40% EDV, 30% VWO.
Portfolio 3 is 40% UPRO, 60% TMF.
Portfolio 4 is 40% UPRO, 60% EDV.
Portfolio 5 is 40% UPRO, 60% IEF.

In the rough early part of that period, when the US dollar experienced high inflation & high interest rates & rising yields, from 1976-1981, only portfolio 5 posted positive nominal returns (7.49% CAGR) but the first two weren't that far negative (-0.73% and -0.27%) compared to the others, which had CAGR of -7.55% and -3.2%. Or, in simpler terms, the IEF portfolio had $15,400 on $10k while the others had $9572, $9840, $6243, and $8229. This also speaks relatively in favor of 60% EDV, which avoids a lot of the interest (-120% cash position), expenses, and duration exposure compared to 60% TMF.

From 1976-1995, the 30% UPRO / 30% TMF / 40% VWO portfolio had 15.41% CAGR with 0.52 Sharpe, 1.76 Sortino.
From 1976-1995, the 40% UPRO / 60% EDV had 14.04% CAGR with 0.44 Sharpe, 1.59 Sortino.

From 1996-2015, the 30% UPRO / 30% TMF / 40% VWO portfolio had 14.94% CAGR with 0.74 Sharpe, 3.14 Sortino.
From 1996-2015, the 40% UPRO / 60% EDV had 13.88% CAGR with 0.66 Sharpe, 2.51 Sortino.

There may be other opportunities to use 'risky' asset classes with high returns and relatively low correlation to UPRO in order to improve risk-adjusted return in a backtest and to improve the odds, in a very real sense, of getting higher returns in the future. Using UPRO and TMF makes room for these other asset classes by being efficient at getting exposure to their risks with a minimum of cash.

The two potential weak points of a UPRO/TMF portfolio are, in simple terms, UPRO and TMF. We don't usually think of the S&P 500 as being something that could drag down returns, but that wasn't much consolation in 2000-2003 or (say) to the buyers of Japanese stock in the late 80s. Apparently both of those weak points can be shored up by reducing the allocation to each and making room for other return-generating assets that aren't fully correlated with the S&P 500 or to long term treasuries.

Image

P1 uses 30% UPRO / 30% TMF / 40% VWO (emerging markets).
P2 uses 30% UPRO / 30% TMF / 40% VEA (developed markets).
P3 uses 30% UPRO / 30% TMF / 40% VNQ (real estate).
P4 uses 30% UPRO / 30% TMF / 40% VWEAX (high yield bonds).
P5 uses 30% UPRO / 60% TMF.

Given that the falling rates were obviously great for backtesting the CAGR of 60% TMF, and the current low rates (relative to a 1979 starting point) represent a headwind for 60% TMF (since they can't harvest the same degree of benefits of falling rates), these alternatives do look reasonable. Diversifying further with that extra 40% of space in the portfolio may be even more reasonable.

* The 1976 and 1979 starting points were based on the youngest fund / source of data. The 2015 end point, the second time, was because I forgot to edit the cell back to 2018... but I suppose it's interesting nonetheless.
Kbg
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Kbg »

On rebalancing periodicity and volatility weighting with 3xETFs, a worthwhile study is to do some simulations on runs of sequential negative quarters vs. annual rebalancing. Which will do better going forward is path dependent, the ability to reset the portfolio is known in advance. Is that incremental performance worth the risk?

Alternatively, with leverage at these level does one want a methodology that maxes you out on equity before the fall and minimizes it on the rebound?

Cagrs over a long period of time hide quite a bit of reality.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

Kbg wrote: Mon Jul 22, 2019 7:25 pm On rebalancing periodicity and volatility weighting with 3xETFs, a worthwhile study is to do some simulations on runs of sequential negative quarters vs. annual rebalancing. Which will do better going forward is path dependent, the ability to reset the portfolio is known in advance. Is that incremental performance worth the risk?
As you point out, you get to sit in your positions longer, so you're trading off "incremental performance" for less deep drawdowns.

edit: but, nah, I think it's worth it to avoid annual rebalancing, the components can drift too far too fast from your desired allocation.
Last edited by MoneyMarathon on Mon Jul 22, 2019 11:53 pm, edited 1 time in total.
EfficientInvestor
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor »

305pelusa wrote: Mon Jul 22, 2019 4:18 pm I can't get leverage if I have to secure every dollar of the put with my own dollars. At that point I would just buy the underlying security and be done with it haha.

The lower the margin requirements, the higher the levels of leverage you can obtain. Futures have low margin requirements, which allows for higher levels of leverage for a given amount of funds.

Because I am only interested in leveraging in the 1-2.5 range, the amount of collateral in my account is high enough that a margin call is somewhat unlikely with the options or the futures. So I don't even factor in the margin requirements of the puts. If you're only using them for 1-2 x leverage, it's just really hard to get a margin call.

As to your second question, you might be suffering from the unfortunate problem that the word "margin" has two completely different meanings. Margin could mean borrowing money from a broker to buy more things (where you would pay a rate for the borrowed funds). It also means the collateral ("margin requirement") for options and futures. As long as I meet the margin requirements (collateral) for my positions, I don't pay a cent for anything because I am not borrowing anything.

Does that kinda make sense?
Thanks. It was definitely a case of confusing my margin terms. It's all clear now. I've been trading options for several years now but have never considered doing anything that wasn't cash secured. So I've never taken the time to really understand margin with regard to options. I always knew it was collateral (like with futures), but for some reason, I assumed that there was also a borrowing cost associated with it in addition to it serving as collateral.

For others having trouble understanding the difference, the article at the link below sums it up well:

http://www.optionstrading.org/introduct ... es/margin/
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

Kbg wrote: Mon Jul 22, 2019 7:25 pm On rebalancing periodicity and volatility weighting with 3xETFs, a worthwhile study is to do some simulations on runs of sequential negative quarters vs. annual rebalancing. Which will do better going forward is path dependent, the ability to reset the portfolio is known in advance. Is that incremental performance worth the risk?

Alternatively, with leverage at these level does one want a methodology that maxes you out on equity before the fall and minimizes it on the rebound?

Cagrs over a long period of time hide quite a bit of reality.
I’ll have to take a peek at some specific periods but from what I’ve seen historically the periodic rebalancing with an allocation reset based on volatility has been quite impressive overall. Sure you may have an inopportune rebalance on a sudden drop but you also have decades of higher average equity exposure during calm bulls.

Annual rebalance is also susceptible to huge run ups that are not capitalized on.

More thought needed for sure.

EDIT: See my other post below but annual actually performed pretty terribly in major drawdowns historically at-least.
Last edited by MotoTrojan on Mon Jul 22, 2019 11:16 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

MoneyMarathon wrote: Mon Jul 22, 2019 7:39 pm
Kbg wrote: Mon Jul 22, 2019 7:25 pm On rebalancing periodicity and volatility weighting with 3xETFs, a worthwhile study is to do some simulations on runs of sequential negative quarters vs. annual rebalancing. Which will do better going forward is path dependent, the ability to reset the portfolio is known in advance. Is that incremental performance worth the risk?
Annual rebalancing is the only way I would do this now. As you point out, you get to sit in your positions longer, so you're trading off "incremental performance" for less deep drawdowns. All the big drawdowns did better with annual rebalancing (especially if you also throw in a rule like rebalance earlier if the S&P drops 25% or more, reducing the dependency on timing in 1987 and 2008). Especially if they were multi-year bear markets that decrease year over year... which are more common than just the experience of 2008-2009 would condition us to expect.

This also makes it practical to do this in taxable space.
Can you show a big drawdown that did best with annual rebalancing?

Using the 1955-1982 period the difference in drawdown from monthly and annual is 3%... from 77% to 80%.

Annual from 1987-2019 had a 52% drawdown from Black Friday compared to only 31.5% for quarterly (impressive). Quarterly was 49% overall (GFC). Monthly volatility balanced was 42%...
Last edited by MotoTrojan on Mon Jul 22, 2019 10:37 pm, edited 4 times in total.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
What does US outperformance have to do with US rates continuing down perpetually?
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

MotoTrojan wrote: Mon Jul 22, 2019 9:33 pm
MoneyMarathon wrote: Mon Jul 22, 2019 7:39 pmAs you point out, you get to sit in your positions longer, so you're trading off "incremental performance" for less deep drawdowns.
Can you show a big drawdown that did best with annual rebalancing?
In 2000-2002, there was a final balance of $8936 for quarterly, $8065 for semi-annually, and $9397 for annually.

In 1987, stocks had a big run up, which made the portfolio unbalanced by the time of the crash, if doing annual rebalancing. Quarterly rebalancing got through 1987 with a $9,000 balance, semi-annual with $8,500, and annual with only $7,000. So annual rebalancing sucked for that year.

Never mind. It's not much of a contest in a tax-advantaged account. If going taxable, seems like it could be more worthwhile to get better at managing LTCG harvesting and tax-loss harvesting, while still keeping an overall quarterly rebalancing strategy.

And... maybe that's too much work. There's a lot to be said for just being able to push a button.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pmBut for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t
For the true lottery ticket experience, I'm starting to think this really is the way to do it:

(1) Put it in Roth space in M1 finance.
(2) Pick 40% UPRO, or 50% UPRO if you're really bullish.
(3) Pick 10% UGLD if you're worried about inflation / greedy for a gold bull run.
(4) Put the rest in TMF.
(5) Click rebalance quarterly.

Nothing else "pops" like that in the historical data, for at least the chance at very outsized returns.

Using the PIMCO funds and doing other things may make sense too, but it's not the same thing.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

MoneyMarathon wrote: Mon Jul 22, 2019 11:51 pm
MotoTrojan wrote: Mon Jul 22, 2019 9:33 pm
MoneyMarathon wrote: Mon Jul 22, 2019 7:39 pmAs you point out, you get to sit in your positions longer, so you're trading off "incremental performance" for less deep drawdowns.
Can you show a big drawdown that did best with annual rebalancing?
In 2000-2002, there was a final balance of $8936 for quarterly, $8065 for semi-annually, and $9397 for annually.

In 1987, stocks had a big run up, which made the portfolio unbalanced by the time of the crash, if doing annual rebalancing. Quarterly rebalancing got through 1987 with a $9,000 balance, semi-annual with $8,500, and annual with only $7,000. So annual rebalancing sucked for that year.

Never mind. It's not much of a contest in a tax-advantaged account. If going taxable, seems like it could be more worthwhile to get better at managing LTCG harvesting and tax-loss harvesting, while still keeping an overall quarterly rebalancing strategy.

And... maybe that's too much work. There's a lot to be said for just being able to push a button.
Interesting stuff for sure. Quarterly does seem to be a nice balance for naive rebalancing. Still intrigued by the volatility managed results in back testing though. Seems to help in every situation I’ve evaluated but I can see the risk of riding a downturn and missing the rebound, fundamentally.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

MoneyMarathon wrote: Tue Jul 23, 2019 12:26 am
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pmBut for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t
For the true lottery ticket experience, I'm starting to think this really is the way to do it:

(1) Put it in Roth space in M1 finance.
(2) Pick 40% UPRO, or 50% UPRO if you're really bullish.
(3) Pick 10% UGLD if you're worried about inflation / greedy for a gold bull run.
(4) Put the rest in TMF.
(5) Click rebalance quarterly.

Nothing else "pops" like that in the historical data, for at least the chance at very outsized returns.

Using the PIMCO funds and doing other things may make sense too, but it's not the same thing.
Exactly my point.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 12:53 am
MoneyMarathon wrote: Tue Jul 23, 2019 12:26 am
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pmBut for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t
For the true lottery ticket experience, I'm starting to think this really is the way to do it:

(1) Put it in Roth space in M1 finance.
(2) Pick 40% UPRO, or 50% UPRO if you're really bullish.
(3) Pick 10% UGLD if you're worried about inflation / greedy for a gold bull run.
(4) Put the rest in TMF.
(5) Click rebalance quarterly.

Nothing else "pops" like that in the historical data, for at least the chance at very outsized returns.

Using the PIMCO funds and doing other things may make sense too, but it's not the same thing.
Exactly my point.
Why not utilize volatility adjusted allocation (target volatility or risk parity)? Seems you’re hyper focused on the backtests “pop” and both of these slaughter naive quarterly.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

Because OP hasn’t shown a keen interest in modern finance and asset management research.

There are goods and bads; no finance professional would plop down and play with 40% UPRO / 60% TMF in a backtester, and yet this thread is probably one of the best contributions to DIY investing in the past year.

But also, ignoring diversification, ignoring all forms of mean variance optimisation like risk parity, etc is going to drag down OP’s risk adjusted returns. And looking for pretty backtests over specific time periods is a great way to make suboptimal choices.

I will say, wanting a buy and hold portfolio mix does have value. It’s why I’m looking at 40/50/10 UPRO EDV GLD.
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