HEDGEFUNDIE's excellent adventure Part II: The next journey

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HEDGEFUNDIE
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HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HEDGEFUNDIE » Sun Aug 11, 2019 9:41 pm

[This thread is a continuation of HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs] --admin LadyGeek]

Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF

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

Post by samsdad » Sun Aug 11, 2019 9:43 pm

rascott wrote:
Sun Aug 11, 2019 9:25 pm
<snip>
In the 4.5 years since Jan 2015, this strategy has mainly trailed the SP500. After the run-up this year it's back to about even with it....all while being much more volatile.
Meh. Notwithstanding interest rates and their implications, in the many hours I’ve looked at this and other variations of this strategy, one of the things that stick out for me is that oftentimes this strategy would’ve lagged or zigged and zagged under or over the performance of the 500 for the first x number of years (pick a start date) before taking off and leaving the 500 in the dust.

Even the OP dataset shows this from the very beginning. You would’ve zigged and zagged the 500 had you started in 1987 and wouldn't have left its orbit till 1995.

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

Post by MoneyMarathon » Sun Aug 11, 2019 9:48 pm

samsdad wrote:
Sun Aug 11, 2019 9:43 pm
rascott wrote:
Sun Aug 11, 2019 9:25 pm
<snip>
In the 4.5 years since Jan 2015, this strategy has mainly trailed the SP500. After the run-up this year it's back to about even with it....all while being much more volatile.
Meh. Notwithstanding interest rates and their implications, in the many hours I’ve looked at this and other variations of this strategy, one of the things that stick out for me is that oftentimes this strategy would’ve lagged or zigged and zagged under or over the performance of the 500 for the first x number of years (pick a start date) before taking off and leaving the 500 in the dust.

Even the OP dataset shows this from the very beginning. You would’ve zigged and zagged the 500 had you started in 1987 and wouldn't have left its orbit till 1995.
The phenom you're looking at is the component of returns (some small delta minus, sometimes, but mostly large plus in this time period) from TMF due to overall falling yields.

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

Post by MotoTrojan » Sun Aug 11, 2019 9:57 pm

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
Interesting. Similar approach to my dilution of TMF with EDV, albeit you’re maintaining the leverage. Seems like a significant change (50/50 even would’ve been significant).

I do find it comical how your three backtest periods are during a bull market. How did 55/45 do overall...?

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

Post by rascott » Sun Aug 11, 2019 10:00 pm

samsdad wrote:
Sun Aug 11, 2019 9:43 pm
rascott wrote:
Sun Aug 11, 2019 9:25 pm
<snip>
In the 4.5 years since Jan 2015, this strategy has mainly trailed the SP500. After the run-up this year it's back to about even with it....all while being much more volatile.
Meh. Notwithstanding interest rates and their implications, in the many hours I’ve looked at this and other variations of this strategy, one of the things that stick out for me is that oftentimes this strategy would’ve lagged or zigged and zagged under or over the performance of the 500 for the first x number of years (pick a start date) before taking off and leaving the 500 in the dust.

Even the OP dataset shows this from the very beginning. You would’ve zigged and zagged the 500 had you started in 1987 and wouldn't have left its orbit till 1995.
I agree...and it's why I think this should all be approached with a bit of caution, just using set it and forget it parameters. I think the work that several have done here breaking down target volatility and volatility look-back for risk parity is interesting. At the end of the day we are all making a "bet" in a manner to have the best odds to beat owning the vanilla index without taking on extreme risk.

I'm personally pretty strongly up there on the risk tolerant scale....and have long thought about leverage for owning equities as someone in their mid/late 30s. I've been leveraged into real estate investing for 15+ years....and that's kind of my investment background. It's interesting how leverage is seen so positively in the RE investing community...basically a necessity to make any out-sized gains (which you'd need for the work required). But when it comes to equities you are looked at as rather insane for even considering it. I know how to appropriately use leverage in RE....and what's comfortable for my risk tolerance vs over the top. But I'm rather naive in general when it comes to applying leverage to portfolios....and what's the "ideal" rate. If nothing else, this "adventure" is helping with that.
Last edited by rascott on Sun Aug 11, 2019 10:02 pm, edited 1 time in total.

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

Post by samsdad » Sun Aug 11, 2019 10:02 pm

MoneyMarathon wrote:
Sun Aug 11, 2019 9:48 pm
samsdad wrote:
Sun Aug 11, 2019 9:43 pm
rascott wrote:
Sun Aug 11, 2019 9:25 pm
<snip>
In the 4.5 years since Jan 2015, this strategy has mainly trailed the SP500. After the run-up this year it's back to about even with it....all while being much more volatile.
Meh. Notwithstanding interest rates and their implications, in the many hours I’ve looked at this and other variations of this strategy, one of the things that stick out for me is that oftentimes this strategy would’ve lagged or zigged and zagged under or over the performance of the 500 for the first x number of years (pick a start date) before taking off and leaving the 500 in the dust.

Even the OP dataset shows this from the very beginning. You would’ve zigged and zagged the 500 had you started in 1987 and wouldn't have left its orbit till 1995.
The phenom you're looking at is the component of returns (some small delta minus, sometimes, but mostly large plus in this time period) from TMF due to overall falling yields.
It also happens when you start in 1955 till about 67.

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

Post by 305pelusa » Sun Aug 11, 2019 10:04 pm

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
This is not risk parity any more correct? I have a hard time believing that a dollar in 30 year treasuries is riskier than a dollar in the market.

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

Post by rascott » Sun Aug 11, 2019 10:05 pm

Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!

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

Post by HEDGEFUNDIE » Sun Aug 11, 2019 10:07 pm

305pelusa wrote:
Sun Aug 11, 2019 10:04 pm
HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
This is not risk parity any more correct? I have a hard time believing that a dollar in 30 year treasuries is riskier than a dollar in the market.
If you follow the market timing, ahem, excuse me, adaptive allocation sub-strategies already mentioned here, what is risk parity changes every 20 days or so.

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

Post by MoneyMarathon » Sun Aug 11, 2019 10:12 pm

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
Makes sense, as this position works very well whether rates are flat or falling, so it should outperform pretty strongly as long as your overall thesis is correct (that we should not see much inflation or any steep increase in rates) - and the thesis is, certainly, plausible. It should also catch up on the other side of any bear market, so long term buy and holders just gotta hold on.

If we dig back into the first decade of Simba's spreadsheet (1955-1964), when 10-year yields were still no more than 4.2% and hadn't begun their steep climb of the late 1960s and 1970s (hitting 5% and then going ever higher), perhaps this could provide some way to compare to today's situation, at least vaguely.

P1 is 55% UPRO, P2 is 40% UPRO, and P3 is the S&P 500 index.

Image

The simulation of 55% UPRO / 45% TMF would have rewarded the leverage with an 18.58% return during the decade 1955-1964. Meanwhile, the 40% UPRO / 60% TMF simulated portfolio only slightly edged out the index itself in this time period, with 13.82% return to the index's 12.68% CAGR. This also agrees with your own backtests on some truly start-against-finish flat rate environments in the last decade or so, when there was only a small premium for leveraging up 40% / 60% but a much larger one at 50% / 50% (or higher, like 55% UPRO / 45% TMF).
Last edited by MoneyMarathon on Sun Aug 11, 2019 10:14 pm, edited 1 time in total.

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

Post by samsdad » Sun Aug 11, 2019 10:13 pm

rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095

HEDGEFUNDIE, how about a link in the OP to my directions on how to do this?

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

Post by 305pelusa » Sun Aug 11, 2019 10:14 pm

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 10:07 pm
305pelusa wrote:
Sun Aug 11, 2019 10:04 pm
HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
This is not risk parity any more correct? I have a hard time believing that a dollar in 30 year treasuries is riskier than a dollar in the market.
If you follow the market timing, ahem, excuse me, adaptive allocation sub-strategies already mentioned here, what is risk parity changes every 20 days or so.
I don't buy into any of those backtested strategies and you know it. I thought you didn't either.

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

Post by MoneyMarathon » Sun Aug 11, 2019 10:19 pm

samsdad wrote:
Sun Aug 11, 2019 10:02 pm
It also happens when you start in 1955 till about 67.
From 1955-1967, the S&P 500 is sometimes under, sometimes over, that part is correct. (The S&P is in red.)

Image

The 40% UPRO / 60% TMF portfolio never pulls away strongly in this time period. So the alternation did happen back then, but the "taking off and leaving the 500 in the dust" bit didn't.

You get the "taking off and leaving the 500 in the dust" bit if and only if there are falling yields.

For obvious reasons.

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

Post by HEDGEFUNDIE » Sun Aug 11, 2019 10:24 pm

samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095

HEDGEFUNDIE, how about a link in the OP to my directions on how to do this?
Will do.

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

Post by MoneyMarathon » Sun Aug 11, 2019 10:31 pm

MotoTrojan wrote:
Sun Aug 11, 2019 9:57 pm
I do find it comical how your three backtest periods are during a bull market. How did 55/45 do overall...?
Over the time period 1955-2018, anyway, the returns were higher all the way up to 55% UPRO / 45% TMF. It's pretty bold, though. Little OGs might want to spring for the milder version at 50% UPRO / 50% TMF for a less bumpy ride in a bear market for stocks.

Image

P1 is 55% UPRO.
P2 is 50% UPRO.
P3 is 45% UPRO.
P4 is 40% UPRO.
P5 is the S&P 500 index.

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

Post by rascott » Sun Aug 11, 2019 10:42 pm

samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095
Thanks, I figured it out after digging around a while. It won't really do what I was trying to do, however. I can backtest the benchmark fine, but it won't allow me to use the UPROSIM in any of the timing models as an asset choice.

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

Post by samsdad » Sun Aug 11, 2019 10:49 pm

rascott wrote:
Sun Aug 11, 2019 10:42 pm
samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095
Thanks, I figured it out after digging around a while. It won't really do what I was trying to do, however. I can backtest the benchmark fine, but it won't allow me to use the UPROSIM in any of the timing models as an asset choice.
Sure it does. Make sure you give it a ticker symbol.

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

Post by privatefarmer » Sun Aug 11, 2019 10:54 pm

MoneyMarathon wrote:
Sun Aug 11, 2019 10:31 pm
MotoTrojan wrote:
Sun Aug 11, 2019 9:57 pm
I do find it comical how your three backtest periods are during a bull market. How did 55/45 do overall...?
Over the time period 1955-2018, anyway, the returns were higher all the way up to 55% UPRO / 45% TMF. It's pretty bold, though. Little OGs might want to spring for the milder version at 50% UPRO / 50% TMF for a less bumpy ride in a bear market for stocks.

Image

P1 is 55% UPRO.
P2 is 50% UPRO.
P3 is 45% UPRO.
P4 is 40% UPRO.
P5 is the S&P 500 index.
Why is it that siamonds data says the max DD for s/p500 was only 38%? It lost like 50% in the GFC...

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

Post by Hydromod » Sun Aug 11, 2019 11:01 pm

samsdad wrote:
Sun Aug 11, 2019 10:49 pm
rascott wrote:
Sun Aug 11, 2019 10:42 pm
samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095
Thanks, I figured it out after digging around a while. It won't really do what I was trying to do, however. I can backtest the benchmark fine, but it won't allow me to use the UPROSIM in any of the timing models as an asset choice.
Sure it does. Make sure you give it a ticker symbol.
If you want to get really fancy, you can do one or more risk parity combinations externally, then do market timing on the combined asset (given a ticker). I found market timing with four "assets" (risk parity upro/tmf, risk parity upro/TMV, just tmf, and just TMV) to be interesting from 1955 to present.

Dual momentum with 80% 12 month and 20% 1 month weights.
Last edited by Hydromod on Sun Aug 11, 2019 11:03 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 » Sun Aug 11, 2019 11:02 pm

privatefarmer wrote:
Sun Aug 11, 2019 10:54 pm
Why is it that siamonds data says the max DD for s/p500 was only 38%? It lost like 50% in the GFC...
It's always the first trading day of January. It ignores intra-year peaks and intra-year valleys.

Moral of the story: if you don't want to be sick over bear markets, rebalance in January and ignore for the rest of the year. :)

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

Post by samsdad » Sun Aug 11, 2019 11:07 pm

privatefarmer wrote:
Sun Aug 11, 2019 10:54 pm
MoneyMarathon wrote:
Sun Aug 11, 2019 10:31 pm
MotoTrojan wrote:
Sun Aug 11, 2019 9:57 pm
I do find it comical how your three backtest periods are during a bull market. How did 55/45 do overall...?
Over the time period 1955-2018, anyway, the returns were higher all the way up to 55% UPRO / 45% TMF. It's pretty bold, though. Little OGs might want to spring for the milder version at 50% UPRO / 50% TMF for a less bumpy ride in a bear market for stocks.

Image

P1 is 55% UPRO.
P2 is 50% UPRO.
P3 is 45% UPRO.
P4 is 40% UPRO.
P5 is the S&P 500 index.
Why is it that siamonds data says the max DD for s/p500 was only 38%? It lost like 50% in the GFC...
Looks like the spreadsheet is taking the “worst year” data as the max DD. PV shows the worst year as just a little over 37% (at least data from 1955 onward), whereas we all know the fun didn’t stop on December 31st!

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

Post by rascott » Sun Aug 11, 2019 11:08 pm

samsdad wrote:
Sun Aug 11, 2019 10:49 pm
rascott wrote:
Sun Aug 11, 2019 10:42 pm
samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095
Thanks, I figured it out after digging around a while. It won't really do what I was trying to do, however. I can backtest the benchmark fine, but it won't allow me to use the UPROSIM in any of the timing models as an asset choice.
Sure it does. Make sure you give it a ticker symbol.
Thank you!

I'm considering a leverage on/leverage off....using just a simple 200 DMA. When SP500 trading above it, move to 140% (80%VOO/20%UPRO). When trading below it back to 100% VOO. Probably with some kind of buffer bands to avoid whipsaws. This has kept drawdowns equal to a 100% buy and hold investor, but squeezes out nearly 2% CAGR going back to the late 80s.
Last edited by rascott on Sun Aug 11, 2019 11:21 pm, edited 2 times in total.

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

Post by samsdad » Sun Aug 11, 2019 11:11 pm

Hydromod wrote:
Sun Aug 11, 2019 11:01 pm
samsdad wrote:
Sun Aug 11, 2019 10:49 pm
rascott wrote:
Sun Aug 11, 2019 10:42 pm
samsdad wrote:
Sun Aug 11, 2019 10:13 pm
rascott wrote:
Sun Aug 11, 2019 10:05 pm
Can someone please help me with the UPROSIM data. How does one get this data into PV?

I'm sure this has been explained in this thread, but would rather not go through 67 pages :D Thanks!
What, you don’t believe us?!? See my prior post on how to do this: viewtopic.php?p=4578095#p4578095
Thanks, I figured it out after digging around a while. It won't really do what I was trying to do, however. I can backtest the benchmark fine, but it won't allow me to use the UPROSIM in any of the timing models as an asset choice.
Sure it does. Make sure you give it a ticker symbol.
If you want to get really fancy, you can do one or more risk parity combinations externally, then do market timing on the combined asset (given a ticker). I found market timing with four "assets" (risk parity upro/tmf, risk parity upro/TMV, just tmf, and just TMV) to be interesting from 1955 to present.

Dual momentum with 80% 12 month and 20% 1 month weights.
Yes you can get super interesting things when you start saving various things together. I’ll take a look at your idea when I get some time. Thanks

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

Post by physixfan » Mon Aug 12, 2019 12:18 am

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 10:07 pm
305pelusa wrote:
Sun Aug 11, 2019 10:04 pm
HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
This is not risk parity any more correct? I have a hard time believing that a dollar in 30 year treasuries is riskier than a dollar in the market.
If you follow the market timing, ahem, excuse me, adaptive allocation sub-strategies already mentioned here, what is risk parity changes every 20 days or so.
Well, ironically, the 20-day look back risk parity result is exactly 40% UPRO 60% TMF as of today 😂

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

Post by MotoTrojan » Mon Aug 12, 2019 12:42 am

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
Looks to be a decent compromise actually for someone wanting to take on the risk and moderately worried about the current rate environment not having sufficient ammo for the future :sharebeer . Would be interested to see proof of a change :twisted: .

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

Post by MotoTrojan » Mon Aug 12, 2019 12:45 am

MoneyMarathon wrote:
Sun Aug 11, 2019 10:31 pm
MotoTrojan wrote:
Sun Aug 11, 2019 9:57 pm
I do find it comical how your three backtest periods are during a bull market. How did 55/45 do overall...?
Over the time period 1955-2018, anyway, the returns were higher all the way up to 55% UPRO / 45% TMF. It's pretty bold, though. Little OGs might want to spring for the milder version at 50% UPRO / 50% TMF for a less bumpy ride in a bear market for stocks.

Image

P1 is 55% UPRO.
P2 is 50% UPRO.
P3 is 45% UPRO.
P4 is 40% UPRO.
P5 is the S&P 500 index.
Using this tool it actually appears 70/30 was the peak performance (rounding to nearest 5%) for the full 1955-2018 range at 13.49% CAGR :twisted: . I must admit, 55/45 has merit in back-testing at-least.

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

Post by MoneyMarathon » Mon Aug 12, 2019 1:09 am

MoneyMarathon wrote:
Sun Aug 04, 2019 9:55 pm
Thank you for bringing attention to the NTSX fund. Most of us haven't heard of it. Looks like it launched in 2018 and currently has about $5m in assets, while the PIMCO fund launched over ten years ago. Still, it looks look a very promising option.

These two funds are extremely different from each other. Both look like they could be among the best in their niche.

(1) PSLDX uses derivatives for equities that distribute lots of capital gains. It looks like one of the least tax-efficient investments out there. As a result in needs to be held in a tax-advantaged account. In a way, only the existence of tax-advantaged accounts makes PSLDX a viable investment.

NTSX is designed for tax efficiency, making it suitable for taxable accounts. It's a passive investment in the S&P 500: "The fund invests 90% of its net assets in the 500 largest U.S. stocks by market capitalization." So it doesn't have much cause to distribute capital gains on the 0.9x exposure to the S&P 500. Big +1 for NTSX there.

NTSX also gives convenient access to the tax advantages of treasury futures, which now are of use without all the capital gains on stocks: "In instances where fixed income total returns are primarily driven by interest income and held in taxable accounts, any income distributions are subject to withholding tax rates of up to 39.6%. By comparison, capital gains on Treasury futures contracts are taxed at 60% long-term, 40% short-term capital gains rates." This could make it not just a more efficient use of cash but also more tax-efficient than buying an unlevered bond fund.

(2) NTSX has exposure to 0.9x the S&P 500. PSLDX has exposure to 1.0x the S&P 500 and roughly 0.7x exposure to bonds with credit risk (corporate, high yield, international). Credit risk has some correlation to beta.

Both also provide exposure to term risk. In the recent past, when term risk has had negative correlation with beta, this has given PSLDX a net beta loading of about 0.9 and given NTSX a net beta loading of about 0.8, if using a CAPM factor regression. At the same time, by taking on additional credit and term risk, beyond what NTSX takes on, they provided annualized alpha of 13.81% for PSLDX and 5.44% for NTSX.

https://www.portfoliovisualizer.com/fac ... sisResults

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.

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.

(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.

(4) NTSX should perform a bit better in a market decline, due to its lower exposure to market and credit risks, using only treasuries on the bond side. This makes it interesting for those who want a more defensive holding.

In short, PSLDX is better for those who want to take on more market / credit / term risk (it's more loaded on all three risks) and have tax-advantaged space, while NTSX is better for those who want to take on less term risk, no credit risk, and slightly less market risk... or those who need a holding for a taxable account.

I would definitely consider buying NTSX in taxable. Thanks again for pointing it out.
Looks like NTSX just got the Boglehead bump!

Over the last week, assets in NTSX have doubled from $5m to $11m. :moneybag

https://www.wisdomtree.com/etfs/asset-allocation/ntsx
https://screener.fidelity.com/ftgw/etf/ ... mbols=NTSX

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

Post by MoneyMarathon » Mon Aug 12, 2019 1:34 am

MotoTrojan wrote:
Mon Aug 12, 2019 12:45 am
Using this tool it actually appears 70/30 was the peak performance (rounding to nearest 5%) for the full 1955-2018 range at 13.49% CAGR :twisted: . I must admit, 55/45 has merit in back-testing at-least.
Hahaha. Yeah, you're really piling on the equity risk for that extra half a percent in CAGR over a long lifetime. :shock:

Here's a slightly more principled way to think about UPRO exposure.

You might just want to increase your UPRO exposure to get the level of equity-driven returns you want, while keeping the margin of safety you're happy with in a drawdown during a bear market. So how to think about how much UPRO is needed for getting a certain level of expected returns from leverage on the S&P 500, after all costs? Well... I can try to estimate that.
MoneyMarathon wrote:
Sat Aug 10, 2019 10:44 pm
Go forward to July 1991 to get a P/E of 20.14. This may be good enough.

From July 1991 to February 2019, the 40% UPRO / rest in cash portfolio returned 7.77% CAGR, compared to the S&P at 9.57% CAGR. Volatility, interest, and expenses are a drag.
See here:

Image

P1 is 40% UPRO (3x S&P 500) / 60% CASHZERO (no interest cash).
P2 is 50% UPRO / 50% CASHZERO.
P3 is 55% UPRO / 45% CASHZERO.

At 55% UPRO and not any less, you finally get the returns from UPRO alone, rebalanced with no-interest cash, to exceed the historical returns of the S&P 500 in this time period. So that's a pretty sound reason for HEDGEFUNDIE to take the 55% UPRO position. If you want to get the full return of the US stock market with UPRO, relying only on the gains from the US stock market, you need 55% UPRO. At that point you finally overcame the borrowing costs, expenses, and volatility drag, meeting and exceeding the return of just holding the S&P 500 in this time period.

At which point, any returns on the "insurance" (the yield from the bonds and from the spread with the short term borrowing rate, the negative correlation rebalancing bonus, and any price appreciation from falling yields) is gravy.

So it's consistent with the original investment idea - to get the returns of the US stock market (with 55% UPRO), amplified by a position that could have its own rate of return (45% TMF), and using each to rebalance into the other, hopefully with negative correlation. No, it's not quite risk parity. But it is the level at which you could expect to be getting the returns of the S&P 500 from your UPRO, at least if held over the long run and held through some bull markets for stocks and some bull markets for bonds.

Without also adding some other positions or using something other than UPRO and TMF... I get why 55% UPRO makes sense, if the goal is primarily to bet on the return of the US stock market & not primarily to bet on TMF delivering outsized returns. It's a level of UPRO at which you avoid the problem that the TMF position "crowds out UPRO that could be generating serious returns."

(Is it risky? Yes, it's always been risky. Anybody thinking it wasn't risky with 60% TMF isn't paying attention.)

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

Post by EfficientInvestor » Mon Aug 12, 2019 5:44 am

rascott wrote:
Sun Aug 11, 2019 7:52 pm
Interesting strategy......how did you go about coming up with 960% 2-years?
It was somewhat arbitrary. I just used 8x the stock value for the bonds because it would have produced similar volatility to stocks over the time period.

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

Post by EfficientInvestor » Mon Aug 12, 2019 6:17 am

MoneyMarathon wrote:
Sun Aug 11, 2019 8:07 pm
EfficientInvestor wrote:
Sun Aug 11, 2019 2:51 pm
I recently started implementing the strategy with futures contracts and use the 2-year treasuries for the bonds. I was looking back the other day to see when 2-year rates were equal to what they are now. I ended up at January 2003. I then looked to see what the PE ratio was in Jan 2003 vs today. It was 31.4 then (per multpl.com) and is 21.7 now (using your number above). So the PE fell a good bit while the interest rate is now the same as it was then. The backtest below uses 120% stock (like in our standard 3X LETF 40/60 implementation) and uses 960% 2-year treasuries. For the treasury allocation, I just picked a point that would have been similar volatility to stocks over the time period. The resulting CAGR was 18.7% and the max drawdown was -33%. Not bad considering how for the PE ratio dropped and that interest rates finished where they started.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Nice. I do have something to say about this. :wink:

120% SPY with a negative cash position isn't an especially accurate representation of 40% UPRO. It doesn't have the expenses, and it doesn't have the same volatility decay. For example: https://www.portfoliovisualizer.com/bac ... 0&total3=0

If you have the UPROSIM data set, you can see 40% UPRO / 960% SHY (1-3 yr treasury) / -900% CASHX here: https://www.portfoliovisualizer.com/bac ... 0&total3=0

That came out to 16.42% CAGR, starting from Jan 2003. If you have both the UPROSIM and the CASHZERO data set, you can see the returns broken out for the S&P 500 and for the SHY position here: https://www.portfoliovisualizer.com/bac ... total3=100

The 40% UPRO portion contributed 8.42% CAGR, the 960% SHY and -900% cash portion contributed 6.41% CAGR. Combined, that's 1.0842 x 1.0641 = 15.37% CAGR. There was a substantial, additional 1.05% CAGR negative-correlation rebalancing bonus when using the highly-leveraged shorter-duration treasuries, given the total 16.42% CAGR.

Jan 2003 was catching the bottom of a bear market, with a P/E slightly higher than it was in Jan 2000 during the euphoria of the long 90s bull market. The P/E peaked even higher in 2002 around the 40s, just as it shot up over 100 in 2009, thanks more to a recession depressing earnings than prices bidding up the P/E to the same level it is today. I'm not sure the suggestion to find similar P/E implies that finding a higher P/E during the bottom of a bear market will get you a good estimate of the expected return from stocks. But, hey, 8.42% CAGR from a leveraged 1.2x S&P 500 position, even after costs, isn't crazy high either, so this could just be nitpicking.

I think you may have shown that leveraging the 2 year up that much can do better, assuming you can implement it that cheaply! And maybe you're also doing S&P 500 trading more effectively than using UPRO? I'm not clear on that.

Considering my estimate for 40% UPRO / 60% TMF to be only 12% when including the rebalancing bonus (or closer to 13% if the S&P has the higher returns that there were in the time period you considered), a 16%-ish figure could convince some people that they want to learn your options trading ways. :wink:
I agree that my backtest doesn't reflect UPRO performance. I was trying to reflect the performance of using futures for both the stock and bond side (which is how I am currently implementing the strategy).

As for the PE ratios...I agree with your take on it. I think the biggest take-away for me is that the strategy can perform quite well over a 15-year period where the interest rates end where they started. The other take-away, which you caught on to, is that higher amounts of leverage on the shorter-term treasuries can provide better results than smaller amounts of leverage on the longer term treasuries. This is especially the case during rising interest rate environments.

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

Post by Lee_WSP » Mon Aug 12, 2019 11:00 am

I like the idea of isolating UPRO by itself with cash. Running it through a monte carlo simulation also gives the same 55% gets you the S&P with more risk result as well.

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

Post by HEDGEFUNDIE » Mon Aug 12, 2019 11:11 am

OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!

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

Post by MotoTrojan » Mon Aug 12, 2019 11:49 am

HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
The more I dwelled on it the less I liked the effort and mental fatigue of the volatility targeting spin-off. I’m fully transferred into 55/45 across the board as well.

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

Post by 305pelusa » Mon Aug 12, 2019 12:15 pm

HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
I'm very confused. So this isn't risk parity any more right? Is this a purposeful move away from what's risk parity in your mind or do you believe that new AA is risk parity in fact?

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

Post by RandomWord » Mon Aug 12, 2019 12:36 pm

305pelusa wrote:
Mon Aug 12, 2019 12:15 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
I'm very confused. So this isn't risk parity any more right? Is this a purposeful move away from what's risk parity in your mind or do you believe that new AA is risk parity in fact?
I am also confused. Seems like classic market timing to me. The bonds went up so you want to sell, I understand the feeling, but there's no particular reason to think that anything has changed for the long-term picture. Better to stay the course, IMO.

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

Post by butricksaid » Mon Aug 12, 2019 12:46 pm

HEDGEFUNDIE wrote:
Fri Aug 09, 2019 5:44 pm

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.
You're not comparing apples to apples because you're not including tax cost in S&P return.

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

Post by MotoTrojan » Mon Aug 12, 2019 1:00 pm

RandomWord wrote:
Mon Aug 12, 2019 12:36 pm
305pelusa wrote:
Mon Aug 12, 2019 12:15 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
I'm very confused. So this isn't risk parity any more right? Is this a purposeful move away from what's risk parity in your mind or do you believe that new AA is risk parity in fact?
I am also confused. Seems like classic market timing to me. The bonds went up so you want to sell, I understand the feeling, but there's no particular reason to think that anything has changed for the long-term picture. Better to stay the course, IMO.
I look forward to the OPs response but I see it as accepting more overall risk by skewing the risk to the equity side, which has truly infinite growth potential, while the bonds do have mathematical forces limiting their ability to repeat the last 37 years.

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

Post by HEDGEFUNDIE » Mon Aug 12, 2019 1:08 pm

MotoTrojan wrote:
Mon Aug 12, 2019 1:00 pm
RandomWord wrote:
Mon Aug 12, 2019 12:36 pm
305pelusa wrote:
Mon Aug 12, 2019 12:15 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
I'm very confused. So this isn't risk parity any more right? Is this a purposeful move away from what's risk parity in your mind or do you believe that new AA is risk parity in fact?
I am also confused. Seems like classic market timing to me. The bonds went up so you want to sell, I understand the feeling, but there's no particular reason to think that anything has changed for the long-term picture. Better to stay the course, IMO.
I look forward to the OPs response but I see it as accepting more overall risk by skewing the risk to the equity side, which has truly infinite growth potential, while the bonds do have mathematical forces limiting their ability to repeat the last 37 years.
+1.

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

Post by RandomWord » Mon Aug 12, 2019 1:19 pm

HEDGEFUNDIE wrote:
Mon Aug 12, 2019 1:08 pm
MotoTrojan wrote:
Mon Aug 12, 2019 1:00 pm
RandomWord wrote:
Mon Aug 12, 2019 12:36 pm
305pelusa wrote:
Mon Aug 12, 2019 12:15 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
I'm very confused. So this isn't risk parity any more right? Is this a purposeful move away from what's risk parity in your mind or do you believe that new AA is risk parity in fact?
I am also confused. Seems like classic market timing to me. The bonds went up so you want to sell, I understand the feeling, but there's no particular reason to think that anything has changed for the long-term picture. Better to stay the course, IMO.
I look forward to the OPs response but I see it as accepting more overall risk by skewing the risk to the equity side, which has truly infinite growth potential, while the bonds do have mathematical forces limiting their ability to repeat the last 37 years.
+1.
What will you do if this continues, and interests rates fall all the way to zero? Would you go 100% equities?

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

Post by butricksaid » Mon Aug 12, 2019 1:29 pm

HEDGEFUNDIE wrote:
Sun Aug 11, 2019 9:41 pm
Therefore, at these rates today, and with the three comparable historical periods I backtested above, I am hereby making the following change to the OG strategy:

55% UPRO / 45% TMF
You're straying from the original strategy <1 year into it after months of testing and discussion. 8-)

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

Post by perplexed » Mon Aug 12, 2019 1:36 pm

I don't see what is wrong in it. Changing plans based on new context is a good thing.
Thank you Hedgefundie for this excellent post and lot of toil you have put into it.

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

Post by butricksaid » Mon Aug 12, 2019 1:40 pm

perplexed wrote:
Mon Aug 12, 2019 1:36 pm
I don't see what is wrong in it. Changing plans based on new context is a good thing.
Thank you Hedgefundie for this excellent post and lot of toil you have put into it.
This comment is so broad and simplified that it is meaningless. "Changing strategies based on new context (recent data)" is known as "returns chasing", remember?

Why don't you switch to SmartBeta index investing since market-cap weighting hasn't paid out recently, how about ETFs tracking IPOs?

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

Post by Hydromod » Mon Aug 12, 2019 1:54 pm

I've never seen a plan that can't be improved. Especially after the amount of scrutiny Hedgefundie's plan has received. It's only a little tweak, in my opinion, and perfectly justified.

Thanks for having this out there. I've learned a bunch.

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

Post by MotoTrojan » Mon Aug 12, 2019 1:55 pm

butricksaid wrote:
Mon Aug 12, 2019 1:40 pm
perplexed wrote:
Mon Aug 12, 2019 1:36 pm
I don't see what is wrong in it. Changing plans based on new context is a good thing.
Thank you Hedgefundie for this excellent post and lot of toil you have put into it.
This comment is so broad and simplified that it is meaningless. "Changing strategies based on new context (recent data)" is known as "returns chasing", remember?

Why don't you switch to SmartBeta index investing since market-cap weighting hasn't paid out recently, how about ETFs tracking IPOs?
I viewed this change as taking the 1955-1982 period into view almost as much, if not more, than the current landscape. I would have been as likely to consider it if rates had been steadily marching towards 3-4%, perhaps even more so as that would have parallels to the past time when such a large exposure to leveraged long bonds hurt you.

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

Post by MotoTrojan » Mon Aug 12, 2019 2:20 pm

HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
Looks like it wasn’t the top.

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

Post by NMBob » Mon Aug 12, 2019 2:38 pm

asset allocation changed because risk parity now actually has little to do with the goal of this nice plan? (thanks so much for the work I have implemented a variant in a small allocation)

Changing AA which increases the probable loss in a bear market greater than a 50/50 would, seems to be the opposite of risk parity. Seems folks now looking at this as return/risk just like folks looking for acceptable return/risk would pick a traditional 60 stock/40 bond AA instead of a risk parity 10 stock/90 bond AA, which is fine with me.
Last edited by NMBob on Mon Aug 12, 2019 2:40 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 » Mon Aug 12, 2019 2:40 pm

NMBob wrote:
Mon Aug 12, 2019 2:38 pm
asset allocation changed because risk parity now actually has little to do with the goal of this nice plan? (thanks so much for the work I have implemented a variant in a small allocation)

Changing AA which increases the probable loss in a bear market, as this does, seems to be the opposite of risk parity. Seems folks now looking at this as return/risk just like folks would pick a 60stock/40 bond AA instead of a risk parity 10stock/90 bond AA, which is fine with me.
In an equity bear market. Risk parity is not about limiting drawdowns but using historical precedence the 55/45 would have a much smaller drawdown than the original 40/60.

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

Post by HEDGEFUNDIE » Mon Aug 12, 2019 2:43 pm

MotoTrojan wrote:
Mon Aug 12, 2019 2:20 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
Looks like it wasn’t the top.
:oops:

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

Post by MotoTrojan » Mon Aug 12, 2019 2:47 pm

HEDGEFUNDIE wrote:
Mon Aug 12, 2019 2:43 pm
MotoTrojan wrote:
Mon Aug 12, 2019 2:20 pm
HEDGEFUNDIE wrote:
Mon Aug 12, 2019 11:11 am
OP updated with the AA change. My rebalance went through this morning after yet another LTT rate drop. Let's hope I sold at the top!
Looks like it wasn’t the top.
:oops:
:sharebeer one day at a time.

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

Post by physixfan » Mon Aug 12, 2019 2:58 pm

I really don't get the reason why OP changed the strategy from risk parity 40/60 to 55/45 which seems random to me.
Image
This is a comparison for the time period Jun 2003 to Nov 2009. I choose this time period because of the same SP500 P/E and the same 20-year rate as mentioned in viewtopic.php?f=10&t=272007&start=3300#p4690830. Also because it included a bear market. It seems to me that the 55/45 allocation performed worse. You can't only use the data from an equity bull market to predict the future...

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