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

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caklim00
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 » Wed Aug 07, 2019 8:06 am

Hydromod wrote:
Tue Aug 06, 2019 7:31 pm
You might want to check with M1 to make sure everything is going well. I tried transferring an entire fund, part went through but not the rest. I got a notification that the transfer was made, but not that only part of the request transferred. I finally got an explanation when I followed up a couple of times. There was a good reason the transfer wasn't made, but communication about it was lacking.
Just made it this morning (Day 9). Setup my allocations based on this mornings PV Values:
33% 1) 40/60 UPRO/TMF (Quarterly rebalance - next Oct 31)
33% 2) 20 day risk parity 43/57 UPRO/TMF (Monthly rebalance - next Aug 30)
34% 3) 20% volatility 41/59 UPRO/TMF (Monthly rebalance - next Aug 30)

Amazing how after the recent volatility all 3 portfolios are starting out near the OPs 40/60 split.

Starting value is 29,974 for me on 8/7

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

Post by jaj2276 » Wed Aug 07, 2019 8:07 am

vel wrote:
Wed Aug 07, 2019 7:19 am
I am about 20 days in on the orig 40/60 upro/tmf. It drifted to 33/67. I am adding some more money to this today and having trouble deciding if I should maintain the 33/67, or use the new money to rebalance it back to 40/60. Since I am only 20 days in, I am leaning toward maintaining the 33/67 (in keeping with the quarterly rebalance).

Does this sound reasonable?
Reasonable? Sure. But by making your money buy using the current 33/67 split, you're buying more of what's "not on sale" and less of what's on sale. Of course that doesn't mean that what's on sale won't be more on sale a week or month or whatever from now. And there could be a good reason as to why certain things are on sale!

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

Post by ocrtech » Wed Aug 07, 2019 8:21 am

MotoTrojan wrote:
Tue Aug 06, 2019 4:45 pm
Hydromod wrote:
Tue Aug 06, 2019 4:39 pm
ocrtech wrote:
Tue Aug 06, 2019 3:10 pm
I was really excited by Targeted Volatility when I originally ran the model without shifting dates. Unfortunately, that one run seems to be an extreme outlier towards the positive. I guess it is a good reminder that we really aren't dealing with sufficient data to truly model any of these approaches.
When you do the comparisons, I'd suggest comparing against the OP strategy with exactly the same start dates and rebalance dates. At least this is an apples to apples comparison. I think you'll find that you will consistently get one or two percentage points higher with the targeted volatility when comparing side-by-side with the same start date.
Excellent point. Should be easy enough to plot the delta between them which could be a very interesting plot.
I graphed out the delta in annual returns for each of the three rebalancing techniques compared to the OPs (Fixed 40/60). Anything greater than zero means it outperformed the 40/60 model and of course vice versa. I was a little surprised how poorly the first two did during the 2001 and 2008 downturns but seems to make up for it during more stable times. The targeted volatility seemed to have problems with many more of the downturns.

Image

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

Post by vel » Wed Aug 07, 2019 8:23 am

jaj2276 wrote:
Wed Aug 07, 2019 8:07 am
vel wrote:
Wed Aug 07, 2019 7:19 am
I am about 20 days in on the orig 40/60 upro/tmf. It drifted to 33/67. I am adding some more money to this today and having trouble deciding if I should maintain the 33/67, or use the new money to rebalance it back to 40/60. Since I am only 20 days in, I am leaning toward maintaining the 33/67 (in keeping with the quarterly rebalance).

Does this sound reasonable?
Reasonable? Sure. But by making your money buy using the current 33/67 split, you're buying more of what's "not on sale" and less of what's on sale. Of course that doesn't mean that what's on sale won't be more on sale a week or month or whatever from now. And there could be a good reason as to why certain things are on sale!
Nice, that's a way to look at it. Aye.. well, I've been on the best run yet the past few days, so I am probably going to stick with 33/67 on the however magical assumption that it encapsulates some market context that I would be undoing by a reversion to 40/60. I guess it's a toss up either way, and there's a rationale to both sides. Thanks

Edit: the waters are choppy today and I don't want to do anything weird, so I'm sticking with 40/60.
Last edited by vel on Wed Aug 07, 2019 8:51 am, edited 1 time in total.

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

Post by Forester » Wed Aug 07, 2019 8:25 am

Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?

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

Post by privatefarmer » Wed Aug 07, 2019 10:02 am

Forester wrote:
Wed Aug 07, 2019 8:25 am
Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?
You’ll get varying answers on this. Depends on the back test. Intermediate term treasuries I believe have back tested well. However, the whole idea behind risk parity is that you are diversifying your exposure to different risk factors (equity, interest rate/term rate, and inflation). Using 10yr treasuries will not have as “pure” exposure to interest rate/term rate risk as a 30yr ETF would. But if that’s all you got then that’s all you got, you may end up needing to hold more of it to achieve risk parity than you would if it were a 30yr fund.

I’m not sure on the nasdaq part. Does the nasdaq simply have more beta exposure? I wouldn’t place any bets on any particular sector the idea is to be MORE diversified not less.

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

Post by MotoTrojan » Wed Aug 07, 2019 10:48 am

Forester wrote:
Wed Aug 07, 2019 8:25 am
Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?
Can you get EDV? I’d use that before a 10 year 3x. Also I would avoid NASDAQ, too volatile. 40/60 UPRO/EDV backtests well; not true risk parity but less risk due to rising rates.

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

Post by Forester » Wed Aug 07, 2019 11:36 am

MotoTrojan wrote:
Wed Aug 07, 2019 10:48 am
Forester wrote:
Wed Aug 07, 2019 8:25 am
Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?
Can you get EDV? I’d use that before a 10 year 3x. Also I would avoid NASDAQ, too volatile. 40/60 UPRO/EDV backtests well; not true risk parity but less risk due to rising rates.
Thanks for the replies.

Not EDV, only an equivalent to TLT. I need to thoroughly read this thread, it sounds like I need to think about sticking to the S&P 500 product, but a smaller proportion.

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

Post by Lee_WSP » Wed Aug 07, 2019 12:17 pm

Practical question on execution if one were to try this leveraged thing with a small yearly allocation.

I never quite realized how much of a drag the $5 per trade fee actually is until I ran the numbers. How do we execute this strategy without incurring excessive trading fee drag?

M1 offers free trades on these?

Invest & re-balance only every other year? Or buy in once a year and rebalance with the new money?

Only execute the strategy if you have a big chunk of change to throw at it?

It seems like a few hundred dollar monthly DCA would incur a fairly significant ETF fee drag of $10 per month.

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

Post by MotoTrojan » Wed Aug 07, 2019 1:07 pm

Lee_WSP wrote:
Wed Aug 07, 2019 12:17 pm
Practical question on execution if one were to try this leveraged thing with a small yearly allocation.

I never quite realized how much of a drag the $5 per trade fee actually is until I ran the numbers. How do we execute this strategy without incurring excessive trading fee drag?

M1 offers free trades on these?

Invest & re-balance only every other year? Or buy in once a year and rebalance with the new money?

Only execute the strategy if you have a big chunk of change to throw at it?

It seems like a few hundred dollar monthly DCA would incur a fairly significant ETF fee drag of $10 per month.
M1 is free to purchase, rebalance, etc... Are you using an IRA or taxable? Taxable has tax implications that would probably justify annual rebalancing, otherwise in an IRA quarterly seems to be a good balance. If your contributions are coming in more often (bi-weekly or monthly) that is fine too and M1 will automatically add it to the underweight holding, moving you towards balance, which I think is a great approach (no need to add via the current allocation IMHO).

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

Post by MotoTrojan » Wed Aug 07, 2019 1:09 pm

privatefarmer wrote:
Wed Aug 07, 2019 10:02 am
Forester wrote:
Wed Aug 07, 2019 8:25 am
Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?
You’ll get varying answers on this. Depends on the back test. Intermediate term treasuries I believe have back tested well. However, the whole idea behind risk parity is that you are diversifying your exposure to different risk factors (equity, interest rate/term rate, and inflation). Using 10yr treasuries will not have as “pure” exposure to interest rate/term rate risk as a 30yr ETF would. But if that’s all you got then that’s all you got, you may end up needing to hold more of it to achieve risk parity than you would if it were a 30yr fund.

I’m not sure on the nasdaq part. Does the nasdaq simply have more beta exposure? I wouldn’t place any bets on any particular sector the idea is to be MORE diversified not less.
From what I have seen it doesn't really matter much what kind of treasury you use (10 year, 20 year, extended duration STRIPS) but only the total volatility/duration-exposure. Thus unless you need to deeply reduce your exposure to duration I would only hold EDV as your unleveraged asset until you have no more TMF. TMF/EDV combined to have the same duration exposure as TMF/IEF (more TMF to balance that) will perform similarly, but the less TMF you hold the better in terms of borrowing costs and expenses.

caklim00
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 » Wed Aug 07, 2019 1:18 pm

MotoTrojan wrote:
Wed Aug 07, 2019 1:09 pm
privatefarmer wrote:
Wed Aug 07, 2019 10:02 am
Forester wrote:
Wed Aug 07, 2019 8:25 am
Could a US 10yr 3x treasury ETF be used for this? Products are more limited in Europe.

Edit: maybe pair it with a leveraged Nasdaq ETF to juice returns on that side, to make up for no access to leveraged 20yr?
You’ll get varying answers on this. Depends on the back test. Intermediate term treasuries I believe have back tested well. However, the whole idea behind risk parity is that you are diversifying your exposure to different risk factors (equity, interest rate/term rate, and inflation). Using 10yr treasuries will not have as “pure” exposure to interest rate/term rate risk as a 30yr ETF would. But if that’s all you got then that’s all you got, you may end up needing to hold more of it to achieve risk parity than you would if it were a 30yr fund.

I’m not sure on the nasdaq part. Does the nasdaq simply have more beta exposure? I wouldn’t place any bets on any particular sector the idea is to be MORE diversified not less.
From what I have seen it doesn't really matter much what kind of treasury you use (10 year, 20 year, extended duration STRIPS) but only the total volatility/duration-exposure. Thus unless you need to deeply reduce your exposure to duration I would only hold EDV as your unleveraged asset until you have no more TMF. TMF/EDV combined to have the same duration exposure as TMF/IEF (more TMF to balance that) will perform similarly, but the less TMF you hold the better in terms of borrowing costs and expenses.
for what its worth, before getting moved over to M1 my other brokerage wouln't sell me TMF so I ended up doing a 20 day risk parity lookback with UPRO/TLT. It will drastically reduce UPRO amount but this might be another option for you. Seemed like a smoother, slightly enhanced S&P 500 fund when I looked at it.

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

Post by Meaty » Wed Aug 07, 2019 2:58 pm

What’s the impact to this strategy if T rates go negative?
"Discipline equals Freedom" - Jocko Willink

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

Post by Lee_WSP » Wed Aug 07, 2019 3:07 pm

Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.

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

Post by firebirdparts » Wed Aug 07, 2019 3:09 pm

Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
Oh my.

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

Post by MotoTrojan » Wed Aug 07, 2019 3:16 pm

Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm
Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.

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

Post by Kbg » Wed Aug 07, 2019 3:50 pm

Excellent graphs on volatility rebalancing...these should be studied to let it sink in. To use an analogy...when you jump off the bridge do you want the parachute already on, or strap it on after the jump? So long as you get it on before hitting the ground you’ll be fine, if you don’t?

And of course you fall further faster without it on.

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

Post by Lee_WSP » Wed Aug 07, 2019 3:53 pm

MotoTrojan wrote:
Wed Aug 07, 2019 3:16 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm
Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.
I'm confused as to the response. If rates go negative, the bond fund will continue to increase in value as investors are now paying the government to hold onto the bond. Unless you are implying that the leveraged fund would not mirror the underlying asset, I am confused as to why TMF would not increase in value by a lot.

Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?

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

Post by HEDGEFUNDIE » Wed Aug 07, 2019 3:58 pm

Lee_WSP wrote:
Wed Aug 07, 2019 3:53 pm
MotoTrojan wrote:
Wed Aug 07, 2019 3:16 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm
Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.
I'm confused as to the response. If rates go negative, the bond fund will continue to increase in value as investors are now paying the government to hold onto the bond. Unless you are implying that the leveraged fund would not mirror the underlying asset, I am confused as to why TMF would not increase in value by a lot.

Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?
Kevin is not correct, he is not accounting for convexity.

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

Post by Lee_WSP » Wed Aug 07, 2019 4:06 pm

HEDGEFUNDIE wrote:
Wed Aug 07, 2019 3:58 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:53 pm
MotoTrojan wrote:
Wed Aug 07, 2019 3:16 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm
Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.
I'm confused as to the response. If rates go negative, the bond fund will continue to increase in value as investors are now paying the government to hold onto the bond. Unless you are implying that the leveraged fund would not mirror the underlying asset, I am confused as to why TMF would not increase in value by a lot.

Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?
Kevin is not correct, he is not accounting for convexity.
That's what I thought. I recently read an article detailing why long term bonds start gaining exponentially as rates get closer to zero. It didn't go into what happened when they go past zero, but I imagine the same thing.

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

Post by MotoTrojan » Wed Aug 07, 2019 4:23 pm

Kbg wrote:
Wed Aug 07, 2019 3:50 pm
Excellent graphs on volatility rebalancing...these should be studied to let it sink in. To use an analogy...when you jump off the bridge do you want the parachute already on, or strap it on after the jump? So long as you get it on before hitting the ground you’ll be fine, if you don’t?

And of course you fall further faster without it on.
I am a bit confused by the plots. Poster says the target volatility did worse in 2001 and 2008 downturns but PV shows just the opposite.

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

Post by butricksaid » Wed Aug 07, 2019 6:14 pm

On the topic of rebalancing frequency: Why not follow Vanguard's recommendation based on time AND threshold? With 3x leverage, the trigger threshold (let's call it T) needs to be higher but the same principles should apply. Anyone know how to do the work to find "T"?

TLDR:
We conclude that for most broadly diversified stock and bond fund portfolios,
annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a
reasonable balance between risk control and cost minimization for most investors. Annual
rebalancing is likely to be preferred when taxes or substantial time/costs are involved.
2019: https://personal.vanguard.com/pdf/ISGGBOT.pdf
2015: https://www.vanguard.com/pdf/ISGPORE.pdf
2010: https://www.vanguard.com/pdf/icrpr.pdf

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

Post by MotoTrojan » Wed Aug 07, 2019 6:33 pm

butricksaid wrote:
Wed Aug 07, 2019 6:14 pm
On the topic of rebalancing frequency: Why not follow Vanguard's recommendation based on time AND threshold? With 3x leverage, the trigger threshold (let's call it T) needs to be higher but the same principles should apply. Anyone know how to do the work to find "T"?

TLDR:
We conclude that for most broadly diversified stock and bond fund portfolios,
annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a
reasonable balance between risk control and cost minimization for most investors. Annual
rebalancing is likely to be preferred when taxes or substantial time/costs are involved.
2019: https://personal.vanguard.com/pdf/ISGGBOT.pdf
2015: https://www.vanguard.com/pdf/ISGPORE.pdf
2010: https://www.vanguard.com/pdf/icrpr.pdf
Risk increase/decrease is still proportional even with the 3x leverage so technically there isn't a risk related reason to have a different T between 1x and 3x leveraged portfolios. There are certainly many reasons to avoid a 5% band with this strategy though.

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

Post by butricksaid » Wed Aug 07, 2019 6:42 pm

MotoTrojan wrote:
Wed Aug 07, 2019 6:33 pm

Risk increase/decrease is still proportional even with the 3x leverage so technically there isn't a risk related reason to have a different T between 1x and 3x leveraged portfolios. There are certainly many reasons to avoid a 5% band with this strategy though.
I'm on the fence about whether these two sentences are contradictory or not.

Given that 3x leverage means higher portfolio volatility, the risks of over-exposure should be higher, and therefore the threshold lower.... (hmm I was hoping to conclude that T = 15% or at least T > 5% but this went the opposite direction)

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

Post by stlutz » Wed Aug 07, 2019 6:58 pm

Lee_WSP wrote:
Wed Aug 07, 2019 4:06 pm
HEDGEFUNDIE wrote:
Wed Aug 07, 2019 3:58 pm


Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?
Kevin is not correct, he is not accounting for convexity.
That's what I thought. I recently read an article detailing why long term bonds start gaining exponentially as rates get closer to zero. It didn't go into what happened when they go past zero, but I imagine the same thing.
Are you saying that the PRICE function in Excel is wrong?

A bond that matures in 20 years, with a 1% coupon, and yielding 0% would price at 120. That lines up with the 20% increase that Kevin mentioned.

Now that's more than the 13% increase that would occur with a bond where the yield declines from 5% to 4%, but that's a lot less exciting that "exponential increase" suggests.

Where are these crazy-high returns on international bond funds which are loaded up with negative yield bonds?

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

Post by rascott » Wed Aug 07, 2019 7:18 pm

So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).

Threw in the OG strategy too.

https://www.portfoliovisualizer.com/bac ... total3=100
Last edited by rascott on Wed Aug 07, 2019 7:24 pm, edited 3 times in total.

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

Post by Hydromod » Wed Aug 07, 2019 7:21 pm

butricksaid wrote:
Wed Aug 07, 2019 6:42 pm
MotoTrojan wrote:
Wed Aug 07, 2019 6:33 pm

Risk increase/decrease is still proportional even with the 3x leverage so technically there isn't a risk related reason to have a different T between 1x and 3x leveraged portfolios. There are certainly many reasons to avoid a 5% band with this strategy though.
I'm on the fence about whether these two sentences are contradictory or not.

Given that 3x leverage means higher portfolio volatility, the risks of over-exposure should be higher, and therefore the threshold lower.... (hmm I was hoping to conclude that T = 15% or at least T > 5% but this went the opposite direction)
I've been looking at this question over the last few days using the 1987-2019 UPROSIM/TMFSIM database. At least the question of bands versus periodic.

I've been assuming a rebalance occurs whenever the current portfolio weights are outside bands based on the current daily optimized weights (risk parity, target volatility, etc.)

I've found that bands would tend to have performed better than periodic on average, but not necessarily gosh golly gee whiz gotta do it better.

You tend to have a lognormal-ish distribution on rebalance frequency. With 5% bands and 20-day lookback, it seems like half of the rebalances or so are one or two days apart. This drops considerably with wider bands and/or longer lookbacks, you can go up to a year between rebalances, but you still end up with occasional frequent updates.

I think that the performance comes from frequent rebalances during rapid transitions. I haven't checked what happens if you limit yourself to no more than weekly, for example.

Hope this helps.

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

Post by Kevin M » Wed Aug 07, 2019 7:31 pm

HEDGEFUNDIE wrote:
Wed Aug 07, 2019 3:58 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:53 pm
MotoTrojan wrote:
Wed Aug 07, 2019 3:16 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm
Meaty wrote:
Wed Aug 07, 2019 2:58 pm
What’s the impact to this strategy if T rates go negative?
We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.
I'm confused as to the response. If rates go negative, the bond fund will continue to increase in value as investors are now paying the government to hold onto the bond. Unless you are implying that the leveraged fund would not mirror the underlying asset, I am confused as to why TMF would not increase in value by a lot.

Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?
Kevin is not correct, he is not accounting for convexity.
Once again (for the third time I think), this is not a matter of convexity, but a matter of duration being related to both yield and coupon rate, but that's just a technical point. The more fundamental point is that I was just using a rough duration rule of thumb, but that doesn't change the main point. To amplify on this ...

Assuming a 25-year par bond (coupon rate = yield) is rolled annually starting at 3%, with rates dropping one percentage point per year, here are the annual capital returns:

3% -> 2%: 19.5%
2% -> 1%: 22.0%
1% -> 0%: 25.0%

(Although the increasing capital returns as both coupon rate and yield drop looks similar to convexity, that's not how convexity typically is defined).

Adding in the coupon returns of 3%, 2% and 1% for each year, we get total annual returns of 22.5%, 24.0% and 26.0%. This generates a 3-year compound return of 91%, so yeah, higher than the off-the-cuff estimate of 73%, but still far shy of the 2,400% return generated from 1982-2018.

Missing the forest (73% compared to 2,400%) for the trees (91% compared to 73%)?

To answer the question about returns if you really believe that the 25-year yield could drop significantly below 0%, a drop from 0% to -1% with a 0% coupon 25-year bond results in a capital return (and total return) of 28.6% = -PV(-1%,25,0%,1)-1. Adding that annual return to the previous three to get to 0% gives a compound return of 146%, so you'll have to go way negative to get to 2,400%, and I don't think anyone wants to live in that world.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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

Post by MoneyMarathon » Wed Aug 07, 2019 7:43 pm

rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).
PSLDX has a lot of credit risk, on top of the same market exposure as 33% UPRO, and some term risk (including some treasuries).

* They will move similarly in a bull market where yields are falling (the backtest chart).

* They will diverge in a bull market where yields are rising (PSLDX may pull ahead)

* They will diverge in a bear market where yields are falling (UPRO/TMF/ILTB will pull ahead)

* They will diverge in a bear market where yields are rising (PSLDX may pull ahead)

* They will diverge in a bull market where yields are flat (PSLDX may pull ahead)

Kevin highlighted a reason one might not prefer to put so many eggs in the "term risk" basket, as a driver of forward-looking returns. But that isn't to knock your allocation strategy, I think it could/should have better returns than most portfolios, with a bit less equity risk than PSLDX, given the relationship between beta and credit risk.

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

Post by rascott » Wed Aug 07, 2019 7:53 pm

MoneyMarathon wrote:
Wed Aug 07, 2019 7:43 pm
rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).
PSLDX has a lot of credit risk, on top of the same market exposure as 33% UPRO, and some term risk (including some treasuries).

* They will move similarly in a bull market where yields are falling (the backtest chart).

* They will diverge in a bull market where yields are rising (PSLDX may pull ahead)

* They will diverge in a bear market where yields are falling (UPRO/TMF/ILTB will pull ahead)

* They will diverge in a bear market where yields are rising (PSLDX may pull ahead)

* They will diverge in a bull market where yields are flat (PSLDX may pull ahead)

Kevin highlighted a reason one might not prefer to put so many eggs in the "term risk" basket, as a driver of forward-looking returns. But that isn't to knock your allocation strategy, I think it could/should have better returns than most portfolios, with a bit less equity risk than PSLDX, given the relationship between beta and credit risk.

Yeah, it's an actively managed bond portfolio, right? So going to be impossible to match it exactly with an index fund. Looking at the annual returns.... there were some years where there was decent divergence. But kind of washed out over this limited back test period. The drawdowns and sharpe ratios were basically identical. And perhaps this wouldn't be as bad in a taxable account....though you've still got to rebalance quarterly to keep it in line.

This combo appears to have higher duration.

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

Post by MoneyMarathon » Wed Aug 07, 2019 8:02 pm

rascott wrote:
Wed Aug 07, 2019 7:53 pm
Yeah, it's an actively managed bond portfolio, right? So going to be impossible to match it exactly with an index fund.
Right, true, and there's no need to try in the first place.

I'm just mentioning that PSLDX doesn't have 100% of bonds in treasuries. It takes on some credit risk, things like corporate bonds or emerging market bonds or even junk bonds. This tends to make it more zippy in bull markets and more crashy in bear markets, than just holding 1.0x the S&P 500.

What it gains there, it also gives up in duration, so it didn't get similar returns in the same way as a high allocation to long term treasuries (term risk). It got similar returns in a different way (lower term risk, higher credit risk).

This won't show up in a backtest that starts in 2010, because it's hard to see the difference until a bear market or at least a sideways market (for stocks, or for bonds). When it's a bull for both markets, they do roughly the same, as already shown in the backtest.

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

Post by HEDGEFUNDIE » Wed Aug 07, 2019 8:06 pm

Kevin M wrote:
Wed Aug 07, 2019 7:31 pm
HEDGEFUNDIE wrote:
Wed Aug 07, 2019 3:58 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:53 pm
MotoTrojan wrote:
Wed Aug 07, 2019 3:16 pm
Lee_WSP wrote:
Wed Aug 07, 2019 3:07 pm

We make out like bandits.
It is good to keep perspective. Stealing this from Kevin M
A drop from about 3% to about 2% on 20-30 year Treasuries gives you your 20% YTD return on long-term Treasuries. A drop from 2% to 1% gives you another 20%, and a drop from 1% to 0% gives you another 20%. That pretty much limits you to about 73% capital return (=1.2^3-1), to which you add the income return.

The Simba backtest spreadsheet shows long-term Treasury cumulative total return from 1982-2018 at about 2,400%. So yeah, it seems more than just borderline fundamentally impossible, but just impossible to earn 2,400% on long-term Treasuries over the next 37 years. This is especially true if you expect yields to remain low, since 2% compounded over 37 years only gives you a 108% income return.
I'm confused as to the response. If rates go negative, the bond fund will continue to increase in value as investors are now paying the government to hold onto the bond. Unless you are implying that the leveraged fund would not mirror the underlying asset, I am confused as to why TMF would not increase in value by a lot.

Also, are you sure Kevin is correct that a drop from 1% to 0% will only increase the fund value by 20%?
Kevin is not correct, he is not accounting for convexity.
Once again (for the third time I think), this is not a matter of convexity, but a matter of duration being related to both yield and coupon rate, but that's just a technical point. The more fundamental point is that I was just using a rough duration rule of thumb, but that doesn't change the main point. To amplify on this ...

Assuming a 25-year par bond (coupon rate = yield) is rolled annually starting at 3%, with rates dropping one percentage point per year, here are the annual capital returns:

3% -> 2%: 19.5%
2% -> 1%: 22.0%
1% -> 0%: 25.0%

(Although the increasing capital returns as both coupon rate and yield drop looks similar to convexity, that's not how convexity typically is defined).

Adding in the coupon returns of 3%, 2% and 1% for each year, we get total annual returns of 22.5%, 24.0% and 26.0%. This generates a 3-year compound return of 91%, so yeah, higher than the off-the-cuff estimate of 73%, but still far shy of the 2,400% return generated from 1982-2018.

Missing the forest (73% compared to 2,400%) for the trees (91% compared to 73%)?

To answer the question about returns if you really believe that the 25-year yield could drop significantly below 0%, a drop from 0% to -1% with a 0% coupon 25-year bond results in a capital return (and total return) of 28.6% = -PV(-1%,25,0%,1)-1. Adding that annual return to the previous three to get to 0% gives a compound return of 146%, so you'll have to go way negative to get to 2,400%, and I don't think anyone wants to live in that world.

Kevin
It is relative return that matters.

91% return in a low-return world is unmatchable. How many years would it take equities to return that much, given the latest forecasts out of Vanguard, etc?

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

Post by JBeck » Wed Aug 07, 2019 8:39 pm

rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.
Can't move any funds to Vanguard?

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

Post by comeinvest » Wed Aug 07, 2019 8:50 pm

MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
...Basically, PSLDX is giving you a lot more risk for your money. For those who want to take that risk and have tax-advantaged space, the expense ratio does not do enough to take away from the additional exposure to market, credit, and term risks, when those risks are paying positive premiums. That's not to say more risk is always better, but those who want exposure to those risks and are willing to pay for it, may prefer PSLDX.
It depends on the overall situation of the investor. If there is no other method of leverage available, this *might* be true.
MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
Expense ratio / leverage is not a meaningful measure for maximizing portfolio performance. If the gains from additional leverage are more than the expense ratio and other costs, the ER / leverage can be worse with the result still being better.
I think your statement is true when there is no other method of leverage available to the investor, or at least no more efficient one, AND if the investor can NOT achieve his desired leverage ratio using this fund across all his accounts. I think in many (most?) cases, I think this is not the case. If the investor can achieve his desired leverage ratio with this fund, then I think ER / assets ratio is the number to look at, all other things (except leverage ratio and ER) being equal. If I know my desired leverage, and my current equity i.e. net worth, then I know my assets that I want to have, and then to minimize my cost, I need to minimize my cost/assets. Because most non-leveraged equity allocations can be had for near 0%, the "leveraged assets / ER" should actually be the discriminating number - in other words, I pay the ER basically only for the leveraged portion in excess of 100%, as up to 100% can be had for free. For example, I could pay twice the ER for a 3x fund than for a 2x fund, as the 3x fund gives me twice the leveraged asset exposure than the 2x fund.
MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
(3) NTSX may perform a bit better in a period of rising rates, due to its lower duration exposure of 3 to 8 years. This makes it an interesting holding for those who want to hedge the risks of rising rates.
...
True, but I guess it takes away from the diversification benefit.

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

Post by MoneyMarathon » Wed Aug 07, 2019 9:04 pm

comeinvest wrote:
Wed Aug 07, 2019 8:50 pm
MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
...Basically, PSLDX is giving you a lot more risk for your money. For those who want to take that risk and have tax-advantaged space, the expense ratio does not do enough to take away from the additional exposure to market, credit, and term risks, when those risks are paying positive premiums. That's not to say more risk is always better, but those who want exposure to those risks and are willing to pay for it, may prefer PSLDX.
It depends on the overall situation of the investor. If there is no other method of leverage available, this *might* be true.
What did you have in mind?

In the quote above, I was comparing PSLDX to NTSX, not any investment choice out there. I'm keenly interested in other funds or ETFs, if they are out there, especially those that don't have to be rebalanced frequently (like these 3x daily ones). I'm not especially interested in cutting out the middle man and using derivatives directly. But if you have some ideas, by all means, share them.

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

Post by rascott » Wed Aug 07, 2019 9:04 pm

JBeck wrote:
Wed Aug 07, 2019 8:39 pm
rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.
Can't move any funds to Vanguard?
Possibility and I may end up doing so. Still waiting to confirm if Ally could do it as well.

I'm playing around with different ideas for a roughly 35% UPRO allocation (which should track the SP500 after costs) and different bond strategies (from conservative to aggressive).... at different leverage levels. I'm still doing the OP method in a M1 Roth, but that's a small piece.

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

Post by ocrtech » Wed Aug 07, 2019 9:33 pm

MotoTrojan wrote:
Wed Aug 07, 2019 4:23 pm
Kbg wrote:
Wed Aug 07, 2019 3:50 pm
Excellent graphs on volatility rebalancing...these should be studied to let it sink in. To use an analogy...when you jump off the bridge do you want the parachute already on, or strap it on after the jump? So long as you get it on before hitting the ground you’ll be fine, if you don’t?

And of course you fall further faster without it on.
I am a bit confused by the plots. Poster says the target volatility did worse in 2001 and 2008 downturns but PV shows just the opposite.
Each graph shows relative gain or loss between two different rebalancing approaches, not absolute gains or losses. When I was talking about 2001 and 2008, I was really referring to the first two graphs. The one with targeted volatility is more inconsistent.

The lack of convergence for the targeted volatility approach makes me nervous. I'm not sure if its the combination of parameter settings for max UPRO cap and volatility target which are inappropriate or if it is just unstable given the data sets we are attempting to use.

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

Post by MotoTrojan » Thu Aug 08, 2019 12:13 am

rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).

Threw in the OG strategy too.

https://www.portfoliovisualizer.com/bac ... total3=100
Again, you'd be better off using EDV to reduce duration exposure and reduce (or eliminate) your need for TMF.

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

Post by MoneyMarathon » Thu Aug 08, 2019 12:54 am

MotoTrojan wrote:
Thu Aug 08, 2019 12:13 am
rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).

Threw in the OG strategy too.

https://www.portfoliovisualizer.com/bac ... total3=100
Again, you'd be better off using EDV to reduce duration exposure and reduce (or eliminate) your need for TMF.
+1

Here's 33% UPRO / 67% EDV and also 35% UPRO / 65% EDV:

https://www.portfoliovisualizer.com/bac ... total3=100

A few dozen extra basis points per year, with essentially the same position, is nice.

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

Post by Kbg » Thu Aug 08, 2019 9:24 am

ocrtech wrote:
Wed Aug 07, 2019 9:33 pm
MotoTrojan wrote:
Wed Aug 07, 2019 4:23 pm
Kbg wrote:
Wed Aug 07, 2019 3:50 pm
Excellent graphs on volatility rebalancing...these should be studied to let it sink in. To use an analogy...when you jump off the bridge do you want the parachute already on, or strap it on after the jump? So long as you get it on before hitting the ground you’ll be fine, if you don’t?

And of course you fall further faster without it on.
I am a bit confused by the plots. Poster says the target volatility did worse in 2001 and 2008 downturns but PV shows just the opposite.
Each graph shows relative gain or loss between two different rebalancing approaches, not absolute gains or losses. When I was talking about 2001 and 2008, I was really referring to the first two graphs. The one with targeted volatility is more inconsistent.

The lack of convergence for the targeted volatility approach makes me nervous. I'm not sure if its the combination of parameter settings for max UPRO cap and volatility target which are inappropriate or if it is just unstable given the data sets we are attempting to use.
I could have misinterpreted...I focused on the words vs the graphs. As mentioned I’ve been doing something like this for quite some time now so I’ve plowed the ground on most of this thread previously/personally. The reality is the behavior/speed of the market move and associated increase in volatility are the determining factors of the Max DD. Normally the two are related but not always. After analyzing the pros and cons of both approaches I opted to always have insurance in place at the beginning. Additionally, if you study market turning points back to the bullish side you will find there is a TON of moveme nt very quickly...so it’s nice to catch that with your full stock allocation.

In short, my take is that the fundamental stock/bond allocation decision is far more important than the rebalancing technique.

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

Post by rascott » Thu Aug 08, 2019 10:28 am

MotoTrojan wrote:
Thu Aug 08, 2019 12:13 am
rascott wrote:
Wed Aug 07, 2019 7:18 pm
So for those that liked PSLDX...but are having trouble buying it anywhere.....like me currently.

33% UPRO
18% TMF
49% ILTB

Seems to track it really well......(rebalanced quarterly).

Threw in the OG strategy too.

https://www.portfoliovisualizer.com/bac ... total3=100
Again, you'd be better off using EDV to reduce duration exposure and reduce (or eliminate) your need for TMF.


Yeah I was just looking to make up some allocation that was close to what PSLDX has in place, not saying that it was "ideal". They clearly use some credit risk, and don't have the level of term risk as UPRO/EDV.

35% UPRO
100% ILTB
-35% CASH

Should in theory match their benchmark index, no? So how would you use a LETF in place of margin?

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

Post by MoneyMarathon » Thu Aug 08, 2019 10:42 am

rascott wrote:
Thu Aug 08, 2019 10:28 am
35% UPRO
100% ILTB
-35% CASH

Should in theory match their benchmark index, no? So how would you use a LETF in place of margin?
EDV (extended duration) is basically the same as 1.5x ILTB, because its price moves approximately 1.5x in the same direction as ILTB. This isn't just for reasons of historical correlation; it's fundamental to what an extended duration treasury is.

So holding 100% ILTB is like holding 67% EDV.

So you can just buy EDV, along with UPRO, at a ratio of 33% UPRO to 67% EDV, or a ratio of 35% UPRO to 65% EDV (whichever ratio you prefer), and save the cost of margin and the expense of LETFs for bonds.

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

Post by NMBob » Thu Aug 08, 2019 11:04 am

MotoTrojan wrote:
Mon Aug 05, 2019 4:07 pm
NMBob wrote:
Mon Aug 05, 2019 3:24 pm
rascott wrote:
Mon Aug 05, 2019 6:38 am
jaj2276 wrote:
Mon Aug 05, 2019 6:35 am
rascott wrote:
Mon Aug 05, 2019 4:39 am
Kind of glad I haven't jumped in with both feet on the volatility lookback..... Things looking pretty ugly this morning if I'd loaded up to 80% UPRO :o :o :shock:
Ya not ideal, ha.
I'll likely still do some for a small piece....because I like the action and the fiddling....and keeps me away from messing with my "normal" accounts. :P probably even use TQQQ :twisted:
TQQQ down 10.6 percent today, is 15 percent of my 3x portfolio...well, it was 15 percent of it lol, but still overall the entire portfolio only down 6 tenths of one percent on the day thanks to about the 57% in these 3: tmf,tdy (mid treasuries) and ugl (2x gold.)
Nice! I have seen some concerns with TDY tracking error and you get similar duration exposure with EDV.
Their returns are certainly not an apple for apple exchange. Right now, TYD is up 37 percent past year while EDV is up 27. In year 2010 edv is about 10 percent return and tdy is 23% etc. 2014 edv 44% vs tyd 25%. 3 negative years for edv vs 2 for tyd , edv with higher highs and lower lows seems to indicate more volatility with edv.

2010-2018,ytd
edv 9.87 56.08 2.37 -19.86 44.66 -4.84 1.64 13.96 -3.39 22.77
TYD 23.59 51.54 10.21 -18.43 25.59 2.15 0.52 5.64 0.75 24.55
Last edited by NMBob on Thu Aug 08, 2019 12:04 pm, edited 2 times in total.

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

Post by MotoTrojan » Thu Aug 08, 2019 11:31 am

MoneyMarathon wrote:
Thu Aug 08, 2019 10:42 am
rascott wrote:
Thu Aug 08, 2019 10:28 am
35% UPRO
100% ILTB
-35% CASH

Should in theory match their benchmark index, no? So how would you use a LETF in place of margin?
EDV (extended duration) is basically the same as 1.5x ILTB, because its price moves approximately 1.5x in the same direction as ILTB. This isn't just for reasons of historical correlation; it's fundamental to what an extended duration treasury is.

So holding 100% ILTB is like holding 67% EDV.

So you can just buy EDV, along with UPRO, at a ratio of 33% UPRO to 67% EDV, or a ratio of 35% UPRO to 65% EDV (whichever ratio you prefer), and save the cost of margin and the expense of LETFs for bonds.
Perfectly stated. I am doing something similar with one of my sub-portfolios (the other is trying out vol. targeting) where I am still maintaining 40% UPRO, but instead of 60% TMF I am using 30/30 TMF/EDV. This reduces my effective leverage on the bond side; I am now away from risk-parity but still have a very efficient portfolio and a bit less impact during rising rate periods.

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

Post by rascott » Thu Aug 08, 2019 11:40 am

MoneyMarathon wrote:
Thu Aug 08, 2019 10:42 am
rascott wrote:
Thu Aug 08, 2019 10:28 am
35% UPRO
100% ILTB
-35% CASH

Should in theory match their benchmark index, no? So how would you use a LETF in place of margin?
EDV (extended duration) is basically the same as 1.5x ILTB, because its price moves approximately 1.5x in the same direction as ILTB. This isn't just for reasons of historical correlation; it's fundamental to what an extended duration treasury is.

So holding 100% ILTB is like holding 67% EDV.

So you can just buy EDV, along with UPRO, at a ratio of 33% UPRO to 67% EDV, or a ratio of 35% UPRO to 65% EDV (whichever ratio you prefer), and save the cost of margin and the expense of LETFs for bonds.
Makes sense, thank you!

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

Post by mikestorm » Thu Aug 08, 2019 11:53 am

What is the consensus on M1 Finance's slippage? By definition, everything is essentially a market order. When we rebalance, how good (really) are the prices? I see people in this thread considering very frequent rebalancing, and am curious if there's a slippage risk that hasn't been considered with doing that.

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

Post by Hydromod » Thu Aug 08, 2019 12:02 pm

mikestorm wrote:
Thu Aug 08, 2019 11:53 am
What is the consensus on M1 Finance's slippage? By definition, everything is essentially a market order. When we rebalance, how good (really) are the prices? I see people in this thread considering very frequent rebalancing, and am curious if there's a slippage risk that hasn't been considered with doing that.
I second the question. And would like to know how to model it...

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

Post by Forester » Thu Aug 08, 2019 12:50 pm

I am slowly working through this thread and have a dumb question; if daily correlation of stocks vs bonds is the key, why did the strategy work by rebalancing quarterly?

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

Post by MotoTrojan » Thu Aug 08, 2019 1:39 pm

Forester wrote:
Thu Aug 08, 2019 12:50 pm
I am slowly working through this thread and have a dumb question; if daily correlation of stocks vs bonds is the key, why did the strategy work by rebalancing quarterly?
In an up market you want to rebalance less often so your equity exposure increases (as does risk), basically maintaining momentum. In a down market you want to rebalance less often (but still somewhere near the bottom) since a persistent down market with frequent rebalancing will result in deeper losses (catching a falling knife). As to why quarterly worked so well, that is chance, but I think these examples show the drawback of too frequent of rebalancing.

MotoTrojan
Posts: 5840
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Thu Aug 08, 2019 1:39 pm

Hydromod wrote:
Thu Aug 08, 2019 12:02 pm
mikestorm wrote:
Thu Aug 08, 2019 11:53 am
What is the consensus on M1 Finance's slippage? By definition, everything is essentially a market order. When we rebalance, how good (really) are the prices? I see people in this thread considering very frequent rebalancing, and am curious if there's a slippage risk that hasn't been considered with doing that.
I second the question. And would like to know how to model it...
I think a reasonable enough start would be to take the average bid-ask spread for both holdings and assume you lose that for the full amount bought & sold.

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