HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
javaDude
Posts: 1
Joined: Tue Aug 13, 2019 2:43 pm

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

Post by javaDude » Tue Aug 13, 2019 2:49 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
I am testing this out. I just created a small "Hedge Fund" account. I am not doing this with Schwab in a taxable account. I instead selling/buying to to re-balance, I anticipate that I will add to my position.

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 2:53 pm

MoneyMarathon wrote:
Tue Aug 13, 2019 1:49 pm
AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now)
I'm also not participating, but I bought PSLDX.

https://www.pimco.com/en-us/investments ... -fund/inst
The analysis in your prior post makes me consider joining you. Seems they may have similar expected returns with vastly different risk profiles.

MoneyMarathon
Posts: 556
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon » Tue Aug 13, 2019 2:59 pm

privatefarmer wrote:
Tue Aug 13, 2019 1:22 am
I can withstand up to a 6% 1-day drop of my portfolio as of now before hitting a margin call. So I think there’s a lot of misunderstanding of how margin calls work. #1 it’s extremely unlikely my portfolio would drop 6% in a single day.
privatefarmer wrote:
Tue Aug 13, 2019 1:22 am
Yes, a ~20% 1-day drop would basically kill my portfolio
Too much fixation on just managing bad 1-day drops. The market can gently grind your portfolio into dust over a 30-90 day period, as you dodge margin calls. You may still have sub-5% of your balance, which is more than 0% but not that much more.

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 3:35 pm

MoneyMarathon wrote:
Tue Aug 13, 2019 1:47 pm

The apparently counter-intuitive thing here is that TMF has generated great returns... during 1987-2018. That's the most important part of what makes the backtest with a full TMF allocation so amazing. The "stock market tanks" anti-correlation-based rebalancing effects are also a factor, but a secondary one: if TMF was a drag or did little for the portfolio otherwise, but just had great anti-correlation, things would have been very different for a backtest on this range of dates.

Using Simba's spreadsheet:

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 7.77% CAGR and 10.97x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 8.07% CAGR and 11.96x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 16.89% CAGR and 147.45x return.

Backing out the different factors, if there were no anti-correlation effect during annual rebalancing (just zero correlation), we might have expected to get a return of 10.97 x 11.96 = 131.2x. A return of 131.2x over 32 years is a CAGR of 16.46%. We actually got a CAGR of 16.89% which allowed us to get an extra 12.4% accumulated over a 32 year time period.

The added value of 60% TMF over the 32 years here was divided between 11.96x return, by itself with zero correlation to no-yield cash, and an extra 1.12x return thanks to the incremental benefit of being anti-correlated with UPRO. Understandably, then, I believe it should be plain that if TMF doesn't deliver strong positive yield all on its own, then you're not going to get it anything close to working like it did 1980s to present.

I setup the Simba spreadsheet to quickly output the rebalancing bonus for a few allocations and I have to say I am pretty unsatisfied with the findings.

55/45 UPRO/TMF
1955-2018 - 0.11%
1955-1982 - 0.22%
1982-2018 - 0.53%

40/60 UPRO/TMF
1955-2018 - 0.12%
1955-1982 - (-0.01%)
1982-2018 - 0.69%

This really takes a hit on my feelings towards the strategy.

kamason86
Posts: 6
Joined: Thu Aug 08, 2013 6:36 pm

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

Post by kamason86 » Tue Aug 13, 2019 3:39 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 8:59 am
Anyone who changed their allocation yesterday with me was rewarded for it today. UPRO up 5% with TMF flat.
I did. I caught the up yesterday in TMF before selling also. Up 5500 total since 3/11. Its been a fun adventure.

TNWoods
Posts: 43
Joined: Sun Feb 10, 2019 10:04 am

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

Post by TNWoods » Tue Aug 13, 2019 3:45 pm

<hand raised>

About 5%, started 40/60 about a month ago, changed allocation & clicked the button today, so tomorrow will be 55/45.

Up 13.8%...trying to decide what color Lambo I will buy.

TNWoods

samsdad
Posts: 739
Joined: Sat Jan 02, 2016 6:20 pm

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

Post by samsdad » Tue Aug 13, 2019 3:50 pm

I have a PortfolioVisualizer question for you PV experts:

I'm considering using a 2-month SMA (monthly rebalancing) strategy like this*: https://www.portfoliovisualizer.com/tes ... total1=100

When I try to convert the 2-month timing period into days, such as 42, or 60, etc. I get a very different CAGR. Does anyone know what the appropriate conversion is?

The reason I ask is because I'd like to just set up a chart over at Fidelity that would tell me what I need to know and skip PV (which would also be easier for my wife just in case something happens to me, etc.) But Fidelity only has a SMA chart in days, not months, and thus the problem.

To make matters worse, I just noticed it that Fidelity and PV have different takes on what the 60-day (for example) SMA is as of yesterday, the 12th. Fidelity thinks it was $53.22:

Image

And PV thinks it was $53.18:

Image

Thoughts?

______
* I'd be capping it at 80/20 or 20/80, just in case you thought I went nuts.

firebirdparts
Posts: 241
Joined: Thu Jun 13, 2019 4:21 pm

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

Post by firebirdparts » Tue Aug 13, 2019 3:51 pm

columbia wrote:
Tue Aug 13, 2019 3:58 am
Now that I own it, it’s interesting to watch PSLDX on days like yesterday: price change was 0.00% (per PIMCO website).
yeah, that felt good.

pepys
Posts: 32
Joined: Mon Nov 12, 2018 10:34 am

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

Post by pepys » Tue Aug 13, 2019 3:58 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
I've been in for a while with a small amount at 50-50. I might go 55-45 based on recent discussion.

User avatar
ThereAreNoGurus
Posts: 326
Joined: Fri Jan 24, 2014 11:41 pm

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

Post by ThereAreNoGurus » Tue Aug 13, 2019 4:00 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
Another hand raised.

Started with 100K which is less than 5% of my investment portfolio.
Trade the news and you will lose.

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 4:08 pm

I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.

dave_k
Posts: 339
Joined: Sat Dec 26, 2015 8:25 pm

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

Post by dave_k » Tue Aug 13, 2019 4:11 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure?
Started with $100K, about 5% of investable assets, up over 40% as of today. Doing 40/60 with quarterly rebalancing so far. Considering moving to or towards 55/45, or going with a monthly windowed volatility based strategy.

User avatar
mrspock
Posts: 472
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Location: Vulcan

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

Post by mrspock » Tue Aug 13, 2019 4:28 pm

AZAttorney11 wrote:
Tue Aug 13, 2019 1:07 pm
Can we get a "show of hands" of those posters who are participating in this excellent adventure? I'm out (for now), but this is the most intriguing thread I've ever read on this forum (market timer's classic is a close second).
Present. Rebalanced (today) to the new 55/45 v2 version of the strategy, I was doing 40/60 until this morning. +39% since early Feb. Using my Roth IRA for this.

ocrtech
Posts: 30
Joined: Sat Jul 21, 2012 2:18 pm

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

Post by ocrtech » Tue Aug 13, 2019 5:17 pm

MotoTrojan wrote:
Tue Aug 13, 2019 3:35 pm
MoneyMarathon wrote:
Tue Aug 13, 2019 1:47 pm

The apparently counter-intuitive thing here is that TMF has generated great returns... during 1987-2018. That's the most important part of what makes the backtest with a full TMF allocation so amazing. The "stock market tanks" anti-correlation-based rebalancing effects are also a factor, but a secondary one: if TMF was a drag or did little for the portfolio otherwise, but just had great anti-correlation, things would have been very different for a backtest on this range of dates.

Using Simba's spreadsheet:

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 7.77% CAGR and 10.97x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 8.07% CAGR and 11.96x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 16.89% CAGR and 147.45x return.

Backing out the different factors, if there were no anti-correlation effect during annual rebalancing (just zero correlation), we might have expected to get a return of 10.97 x 11.96 = 131.2x. A return of 131.2x over 32 years is a CAGR of 16.46%. We actually got a CAGR of 16.89% which allowed us to get an extra 12.4% accumulated over a 32 year time period.

The added value of 60% TMF over the 32 years here was divided between 11.96x return, by itself with zero correlation to no-yield cash, and an extra 1.12x return thanks to the incremental benefit of being anti-correlated with UPRO. Understandably, then, I believe it should be plain that if TMF doesn't deliver strong positive yield all on its own, then you're not going to get it anything close to working like it did 1980s to present.

I setup the Simba spreadsheet to quickly output the rebalancing bonus for a few allocations and I have to say I am pretty unsatisfied with the findings.

55/45 UPRO/TMF
1955-2018 - 0.11%
1955-1982 - 0.22%
1982-2018 - 0.53%

40/60 UPRO/TMF
1955-2018 - 0.12%
1955-1982 - (-0.01%)
1982-2018 - 0.69%

This really takes a hit on my feelings towards the strategy.
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?

Hydromod
Posts: 217
Joined: Tue Mar 26, 2019 10:21 pm

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

Post by Hydromod » Tue Aug 13, 2019 5:46 pm

ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 5:53 pm

Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.

beezquimby
Posts: 81
Joined: Thu May 12, 2016 2:05 pm

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

Post by beezquimby » Tue Aug 13, 2019 6:17 pm

Can someone explain to me the concept of drawdown in relation to this strategy. Thanks

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

Post by MotoTrojan » Tue Aug 13, 2019 6:18 pm

beezquimby wrote:
Tue Aug 13, 2019 6:17 pm
Can someone explain to me the concept of drawdown in relation to this strategy. Thanks
Drawdown is simply the max peak to trough decline, there is nothing specific to this strategy. Most drawdowns reported are monthly (coming from Portfolio Visualizer) although the Simba spreadsheet is also referenced and is annual, so the result will look smaller.

make_a_better_world
Posts: 61
Joined: Mon Mar 18, 2013 11:55 pm

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

Post by make_a_better_world » Tue Aug 13, 2019 6:38 pm

I'm participating as of July 22 with 3.7% of my net worth. Part of it is in taxable and part in Roth. I'm using the Roth to balance the entire thing as if it were one account. I made an Excel sheet to calculate what I need to buy/sell to rebalance. Hopefully the accounts will not become too skewed overtime to the point I am unable to rebalance.

beezquimby
Posts: 81
Joined: Thu May 12, 2016 2:05 pm

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

Post by beezquimby » Tue Aug 13, 2019 6:41 pm

So is the point to buy these two funds and hold them long term, making additional purchases to balance out the 40/60 ratio? I will admit that I am intrigued.

ocrtech
Posts: 30
Joined: Sat Jul 21, 2012 2:18 pm

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

Post by ocrtech » Tue Aug 13, 2019 6:44 pm

MotoTrojan wrote:
Tue Aug 13, 2019 5:53 pm
Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.
Okay, I think I understand the intended approach a little better now. However, the results I obtained using PV are significantly different for the 1987-2019 simulated data set. Running 55(upro)/cash and 45(tmf)/cash as separate portfolios and then combining the results, I got a combined CAGR of 12.17%. For the 55(upro)/45(tmf) portfolio, I got a CAGR of 16.86. That 4.5+% additional points per year adds up to some significant money over a 33 year period.

I must be missing something?

NMBob
Posts: 251
Joined: Thu Apr 23, 2015 8:13 pm

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

Post by NMBob » Tue Aug 13, 2019 6:47 pm

55upro/45tmf rebalancing period pv cagrs. (thanks to folks for the sim data, instructions, and links)

pv rebalancing period // 1987-date sim data // jan 2010-date
none------------------------------------- 10.74----------------------------------25.94
annual----------------------------------- 16.86----------------------------------27.8
quarterly -------------------------------- 17.62--------------------------------- 31.58
monthly -------------------------------- 15.6 ---------------------------------- 29.9

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 6:49 pm

ocrtech wrote:
Tue Aug 13, 2019 6:44 pm
MotoTrojan wrote:
Tue Aug 13, 2019 5:53 pm
Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.
Okay, I think I understand the intended approach a little better now. However, the results I obtained using PV are significantly different for the 1987-2019 simulated data set. Running 55(upro)/cash and 45(tmf)/cash as separate portfolios and then combining the results, I got a combined CAGR of 12.17%. For the 55(upro)/45(tmf) portfolio, I got a CAGR of 16.86. That 4.5+% additional points per year adds up to some significant money over a 33 year period.

I must be missing something?
How did you combine the results? I’ll have to run the numbers later but it shouldn’t be anywhere near that high. Also was this quarterly rebalance?

Topic Author
HEDGEFUNDIE
Posts: 3403
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 6:50 pm

MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

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

MotoTrojan
Posts: 6169
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Aug 13, 2019 6:52 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Equity bull. What happens over the next 30 years though?

Topic Author
HEDGEFUNDIE
Posts: 3403
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 6:54 pm

MotoTrojan wrote:
Tue Aug 13, 2019 6:52 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Equity bull. What happens over the next 30 years though?
The natural state of the stock market is bull mode - how else would the 90 year CAGR on US stocks be 9-10%? Why else would we recommend young people tilt toward equities?

ocrtech
Posts: 30
Joined: Sat Jul 21, 2012 2:18 pm

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

Post by ocrtech » Tue Aug 13, 2019 7:03 pm

MotoTrojan wrote:
Tue Aug 13, 2019 6:49 pm
ocrtech wrote:
Tue Aug 13, 2019 6:44 pm
MotoTrojan wrote:
Tue Aug 13, 2019 5:53 pm
Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.
Okay, I think I understand the intended approach a little better now. However, the results I obtained using PV are significantly different for the 1987-2019 simulated data set. Running 55(upro)/cash and 45(tmf)/cash as separate portfolios and then combining the results, I got a combined CAGR of 12.17%. For the 55(upro)/45(tmf) portfolio, I got a CAGR of 16.86. That 4.5+% additional points per year adds up to some significant money over a 33 year period.

I must be missing something?
How did you combine the results? I’ll have to run the numbers later but it shouldn’t be anywhere near that high. Also was this quarterly rebalance?
Here is the link to what I setup in PV: https://www.portfoliovisualizer.com/bac ... total3=100

For the first two portfolios which contain cash, I added the two final balances together, and then manually calculated the CAGR. For the third portfolio, I used the CAGR provided by PV.

For quarterly rebalancing, the difference is even greater. Around 5.5% CAGR.

Hydromod
Posts: 217
Joined: Tue Mar 26, 2019 10:21 pm

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

Post by Hydromod » Tue Aug 13, 2019 7:08 pm

ocrtech wrote:
Tue Aug 13, 2019 6:44 pm
MotoTrojan wrote:
Tue Aug 13, 2019 5:53 pm
Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.
Okay, I think I understand the intended approach a little better now. However, the results I obtained using PV are significantly different for the 1987-2019 simulated data set. Running 55(upro)/cash and 45(tmf)/cash as separate portfolios and then combining the results, I got a combined CAGR of 12.17%. For the 55(upro)/45(tmf) portfolio, I got a CAGR of 16.86. That 4.5+% additional points per year adds up to some significant money over a 33 year period.

I must be missing something?
If I am doing the calculations correctly, I have

40/60 UPRO/CASH at 10.03 CAGR
40/60 CASH/TMF at 7.23 CAGR
40/60 UPRO/TMF at 16.88 CAGR

Equivalent with cash, investing 40% with UPRO and 60% with TMF, is

(0.4*(1.1003)^32 + 0.6*(1.0723)^32)^(1/32) = 1.0863

So the negative correlation effect is 16.88 - 8.63 = 8.25%

For 55/45:

55/45 UPRO/CASH at 11.58 CAGR
55/45 CASH/TMF at 7.63 CAGR
55/45 UPRO/TMF at 16.86 CAGR

Equivalent with cash, investing 55% with UPRO and 45% with TMF, is

(0.55*(1.1158)^32 + 0.45*(1.0763)^32)^(1/32) = 1.1030

So the negative correlation effect is 16.86 - 10.3 = 6.56%

Am I doing this correctly?

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

Post by MotoTrojan » Tue Aug 13, 2019 8:34 pm

Hydromod wrote:
Tue Aug 13, 2019 7:08 pm
ocrtech wrote:
Tue Aug 13, 2019 6:44 pm
MotoTrojan wrote:
Tue Aug 13, 2019 5:53 pm
Hydromod wrote:
Tue Aug 13, 2019 5:46 pm
ocrtech wrote:
Tue Aug 13, 2019 5:17 pm
Using your first example, are you saying that the difference between making an initial investment of 55/45 and not rebalancing it in anyway compared to rebalancing it on a periodic basis (like monthly) nets you around 0.5 CAGR in a best case scenario?
I think he's saying that doing the 55/45 UPRO/TMF investment with annual rebalancing can be compared to making two investments, 55/45 UPRO/CASH and 55/45 CASH/TMF, both with annual rebalancing.

The first case would have yielded a CAGR that was 0.5 larger than the second case. That's the benefit from negative correlation.

Correct me if I'm wrong.
Precisely, and the CASH isn't generating a return in that analysis. If TMF is flat and this 0.5% rebalancing bonus persists (it was often less) then you'd actually have been better off holding 55% UPRO and 45% in money market, as the 45% money market yield would likely exceed 0.5%.

The OPs premise stated that UPRO generates the returns and TMF just balances it out in downturns, but this proves that is not the case and TMF actually had a HUGE part in the returns since 1982. Given current yields there are limits to TMF's potential future returns, and thus the strategy as a whole. I always knew this to be the case, but did not realize how small the rebalancing bonus really was.
Okay, I think I understand the intended approach a little better now. However, the results I obtained using PV are significantly different for the 1987-2019 simulated data set. Running 55(upro)/cash and 45(tmf)/cash as separate portfolios and then combining the results, I got a combined CAGR of 12.17%. For the 55(upro)/45(tmf) portfolio, I got a CAGR of 16.86. That 4.5+% additional points per year adds up to some significant money over a 33 year period.

I must be missing something?
If I am doing the calculations correctly, I have

40/60 UPRO/CASH at 10.03 CAGR
40/60 CASH/TMF at 7.23 CAGR
40/60 UPRO/TMF at 16.88 CAGR

Equivalent with cash, investing 40% with UPRO and 60% with TMF, is

(0.4*(1.1003)^32 + 0.6*(1.0723)^32)^(1/32) = 1.0863

So the negative correlation effect is 16.88 - 8.63 = 8.25%

For 55/45:

55/45 UPRO/CASH at 11.58 CAGR
55/45 CASH/TMF at 7.63 CAGR
55/45 UPRO/TMF at 16.86 CAGR

Equivalent with cash, investing 55% with UPRO and 45% with TMF, is

(0.55*(1.1158)^32 + 0.45*(1.0763)^32)^(1/32) = 1.1030

So the negative correlation effect is 16.86 - 10.3 = 6.56%

Am I doing this correctly?
No I think everyone is doing something wrong here.

First off, CASHX in Portfolio Visualizer gives the return of t-bills so that is skewing those results.

Next, the allocation of 55/45 is already baked into the individual calcs, so the actual appropriate calculation is to multiply the gains (final value/initial value) and then calculate the combined CAGR.

Using those values you'd be closer to a $3.2M final balance rather than $1.8M for the actual 55/45, that CASHX really boosts things.

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

Post by MotoTrojan » Tue Aug 13, 2019 8:38 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:54 pm
MotoTrojan wrote:
Tue Aug 13, 2019 6:52 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Equity bull. What happens over the next 30 years though?
The natural state of the stock market is bull mode - how else would the 90 year CAGR on US stocks be 9-10%? Why else would we recommend young people tilt toward equities?
The returns since July 2012 have been well above 9-10% so how does that prove anything? Why are you ignoring math that says you can't achieve the past total return without TMF achieving what it did in the past, while agreeing that TMF won't be able to do that?

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

Post by MotoTrojan » Tue Aug 13, 2019 8:41 pm

ocrtech wrote:
Tue Aug 13, 2019 7:03 pm


For the first two portfolios which contain cash, I added the two final balances together, and then manually calculated the CAGR. For the third portfolio, I used the CAGR provided by PV.

For quarterly rebalancing, the difference is even greater. Around 5.5% CAGR.
I was under the impression the proper calculation was to multiply the growth-factor of each sub-portion and calculate CAGR from that.

So: (final_balance_1 * final_balance_2) / (starting_balance_PV) would be your total portfolio value, then you calculate the CAGR of that. That is the value that was 0-0.5% CAGR less than the actual portfolios (rebalancing bonus).

These are not two portfolios held separately then added together, they are means of simulating each assets contribution to the portfolio as a whole. If one of them goes up 10x and the other 3x, then the total growth was 30x, not 13x.

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

Post by physixfan » Tue Aug 13, 2019 9:18 pm

MotoTrojan wrote:
Tue Aug 13, 2019 3:35 pm
MoneyMarathon wrote:
Tue Aug 13, 2019 1:47 pm

The apparently counter-intuitive thing here is that TMF has generated great returns... during 1987-2018. That's the most important part of what makes the backtest with a full TMF allocation so amazing. The "stock market tanks" anti-correlation-based rebalancing effects are also a factor, but a secondary one: if TMF was a drag or did little for the portfolio otherwise, but just had great anti-correlation, things would have been very different for a backtest on this range of dates.

Using Simba's spreadsheet:

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 7.77% CAGR and 10.97x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 8.07% CAGR and 11.96x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 16.89% CAGR and 147.45x return.

Backing out the different factors, if there were no anti-correlation effect during annual rebalancing (just zero correlation), we might have expected to get a return of 10.97 x 11.96 = 131.2x. A return of 131.2x over 32 years is a CAGR of 16.46%. We actually got a CAGR of 16.89% which allowed us to get an extra 12.4% accumulated over a 32 year time period.

The added value of 60% TMF over the 32 years here was divided between 11.96x return, by itself with zero correlation to no-yield cash, and an extra 1.12x return thanks to the incremental benefit of being anti-correlated with UPRO. Understandably, then, I believe it should be plain that if TMF doesn't deliver strong positive yield all on its own, then you're not going to get it anything close to working like it did 1980s to present.

I setup the Simba spreadsheet to quickly output the rebalancing bonus for a few allocations and I have to say I am pretty unsatisfied with the findings.

55/45 UPRO/TMF
1955-2018 - 0.11%
1955-1982 - 0.22%
1982-2018 - 0.53%

40/60 UPRO/TMF
1955-2018 - 0.12%
1955-1982 - (-0.01%)
1982-2018 - 0.69%

This really takes a hit on my feelings towards the strategy.
Can you do this calculation for 2000-present? As I mentioned in a previous thread viewtopic.php?f=10&t=272007&p=4688976#p4688976, the negative correlation actually is confirmed for 2000-present, but not for the several decades before that.

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

Post by MoneyMarathon » Tue Aug 13, 2019 9:19 pm

MotoTrojan wrote:
Tue Aug 13, 2019 8:34 pm
First off, CASHX in Portfolio Visualizer gives the return of t-bills so that is skewing those results.
To use PV instead of Simba's spreadsheet, a custom data set ("CASHZERO") is required.

https://textuploader.com/11ucw

It's just 0 returns in every month. Save as CSV, upload to Portfolio Visualizer.

The 'rebalancing bonus' was bigger for quarterly. Originally I looked at it annually.

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 9:30 pm

MotoTrojan wrote:
Tue Aug 13, 2019 8:38 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:54 pm
MotoTrojan wrote:
Tue Aug 13, 2019 6:52 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Equity bull. What happens over the next 30 years though?
The natural state of the stock market is bull mode - how else would the 90 year CAGR on US stocks be 9-10%? Why else would we recommend young people tilt toward equities?
The returns since July 2012 have been well above 9-10% so how does that prove anything? Why are you ignoring math that says you can't achieve the past total return without TMF achieving what it did in the past, while agreeing that TMF won't be able to do that?
I don’t follow your line of questioning.

1. I acknowledge that the capital return on TMF was a significant contributor to returns since the 1980s.

2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.

3. I have also shown that despite #2, the strategy can still deliver outsize returns, as shown since July 2012.

4. Yes, #3 is attributable to an equity bull market, but if you did not have faith in that continuing, you shouldn’t be leveraging anything in the first place.
Last edited by HEDGEFUNDIE on Tue Aug 13, 2019 9:31 pm, edited 1 time in total.

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

Post by MotoTrojan » Tue Aug 13, 2019 9:31 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
This comparison is more in-favor of your approach but interesting none-the-less. Shows the rebalancing bonus, even with a modest negative TMF return, however the volatility goes up significantly; worth it for a solid 1.5%-1.7% CAGR improvement (bumping up due to CASHX).

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

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

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

Post by MotoTrojan » Tue Aug 13, 2019 9:33 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:38 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:54 pm
MotoTrojan wrote:
Tue Aug 13, 2019 6:52 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm


Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
Equity bull. What happens over the next 30 years though?
The natural state of the stock market is bull mode - how else would the 90 year CAGR on US stocks be 9-10%? Why else would we recommend young people tilt toward equities?
The returns since July 2012 have been well above 9-10% so how does that prove anything? Why are you ignoring math that says you can't achieve the past total return without TMF achieving what it did in the past, while agreeing that TMF won't be able to do that?
I don’t follow your line of questioning.

1. I acknowledge that the capital return on TMF was a significant contributor to returns since the 1980s.

2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.

3. I have also shown that despite #2, the strategy can still deliver outsize returns, as shown since July 2012.

4. Yes, #3 happened during an equity bull market, wnut if you did not have faith in that continuing, you shouldn’t be leveraging anything in the first place.
This is supposed to be a portfolio immune to bulls vs. bears, not used to time when one thinks a bull is here to stay. You showed how this 1.65X equity exposure beat out a 1.0X exposure via PSLDX, but you did this during a raging bull. I don't think you proved anything. Show me how it does in a full market cycle with rates remaining unchanged and I will be intrigued.

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 9:34 pm

MotoTrojan wrote:
Tue Aug 13, 2019 9:31 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
This comparison is more in-favor of your approach but interesting none-the-less. Shows the rebalancing bonus, even with a modest negative TMF return, however the volatility goes up significantly; worth it for a solid 1.5%-1.7% CAGR improvement (bumping up due to CASHX).

https://www.portfoliovisualizer.com/bac ... total3=100
CASHX won’t save your hide in an equity crash.

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

Post by Lee_WSP » Tue Aug 13, 2019 9:35 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.
I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 9:35 pm

MotoTrojan wrote:
Tue Aug 13, 2019 9:33 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
MotoTrojan wrote:
Tue Aug 13, 2019 8:38 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:54 pm
MotoTrojan wrote:
Tue Aug 13, 2019 6:52 pm


Equity bull. What happens over the next 30 years though?
The natural state of the stock market is bull mode - how else would the 90 year CAGR on US stocks be 9-10%? Why else would we recommend young people tilt toward equities?
The returns since July 2012 have been well above 9-10% so how does that prove anything? Why are you ignoring math that says you can't achieve the past total return without TMF achieving what it did in the past, while agreeing that TMF won't be able to do that?
I don’t follow your line of questioning.

1. I acknowledge that the capital return on TMF was a significant contributor to returns since the 1980s.

2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.

3. I have also shown that despite #2, the strategy can still deliver outsize returns, as shown since July 2012.

4. Yes, #3 happened during an equity bull market, wnut if you did not have faith in that continuing, you shouldn’t be leveraging anything in the first place.
This is supposed to be a portfolio immune to bulls vs. bears, not used to time when one thinks a bull is here to stay. You showed how this 1.65X equity exposure beat out a 1.0X exposure via PSLDX, but you did this during a raging bull. I don't think you proved anything. Show me how it does in a full market cycle with rates remaining unchanged and I will be intrigued.
I have never said this strategy is “immune” to anything.

I have been consistent since the beginning in saying that the strategy compares favorably to a 100% equity position.

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

Post by HEDGEFUNDIE » Tue Aug 13, 2019 9:36 pm

Lee_WSP wrote:
Tue Aug 13, 2019 9:35 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.
I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.
I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.

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

Post by MotoTrojan » Tue Aug 13, 2019 9:38 pm

MotoTrojan wrote:
Tue Aug 13, 2019 9:31 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 6:50 pm
MotoTrojan wrote:
Tue Aug 13, 2019 4:08 pm
I am opening an IRA with Ally and will be moving a good chunk of my Roth over to invest in PSLDX. I may leave $5-10K in here just to enjoy the ride but I am feeling enlightened based on MoneyMarathon's rebalancing bonus math.

I still hope you all get yachts but I am struggling to see the light anymore.
Here is a comparison of PSLDX with the revised strategy since July 2012, the first time long rates dropped into the mid-2s. The light still seems plenty bright to me

https://www.portfoliovisualizer.com/bac ... 0&total3=0
This comparison is more in-favor of your approach but interesting none-the-less. Shows the rebalancing bonus, even with a modest negative TMF return, however the volatility goes up significantly; worth it for a solid 1.5%-1.7% CAGR improvement (bumping up due to CASHX).

https://www.portfoliovisualizer.com/bac ... total3=100
Another very telling example is Jan 2009 - Dec 2013 where TMF had a -0.6% CAGR but walloped the 55/45 UPRO/CASHX 34.4% to 27.5%... so there certainly has been a rebalancing bonus in flat TMF conditions in the last decade.

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

Post by Lee_WSP » Tue Aug 13, 2019 9:39 pm

HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:36 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:35 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.
I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.
I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.
True, but the increase in bond fund price is also exponential as rates go lower, so even a single basis point change past zero could mean a 10 or 20% gain in LTT.

If rates rise, TMF is going to look like stocks in 1999.

MotoTrojan
Posts: 6169
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Tue Aug 13, 2019 9:43 pm

Lee_WSP wrote:
Tue Aug 13, 2019 9:39 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:36 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:35 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.
I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.
I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.
True, but the increase in bond fund price is also exponential as rates go lower, so even a single basis point change past zero could mean a 10 or 20% gain in LTT.

If rates rise, TMF is going to look like stocks in 1999.
Doesn't that phenomenon's derivative peak at 0% rates and then start to reduce symmetrically as the rates go to negative? Ie the change from 0.5% to 0% is the same as 0% to -0.5%.

Lee_WSP
Posts: 919
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Location: Arizona

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

Post by Lee_WSP » Tue Aug 13, 2019 9:51 pm

MotoTrojan wrote:
Tue Aug 13, 2019 9:43 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:39 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:36 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:35 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:30 pm
2. I also acknowledge that at 2%, TMF’s upside from here is capped. Which is why I made my AA change to 55/45.
I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.
I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.
True, but the increase in bond fund price is also exponential as rates go lower, so even a single basis point change past zero could mean a 10 or 20% gain in LTT.

If rates rise, TMF is going to look like stocks in 1999.
Doesn't that phenomenon's derivative peak at 0% rates and then start to reduce symmetrically as the rates go to negative? Ie the change from 0.5% to 0% is the same as 0% to -0.5%.
In order for the rate to be negative for existing bonds, people need to pay for the right to own them. Ie, they're still going to pay more. Unless my math is wrong.

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

Post by MotoTrojan » Tue Aug 13, 2019 9:55 pm

Lee_WSP wrote:
Tue Aug 13, 2019 9:51 pm
MotoTrojan wrote:
Tue Aug 13, 2019 9:43 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:39 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:36 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:35 pm


I do not know of any reason bond funds cannot go up in value even if rates go negative. In fact, they should go up by a very large amount if rates indeed went negative.
I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.
True, but the increase in bond fund price is also exponential as rates go lower, so even a single basis point change past zero could mean a 10 or 20% gain in LTT.

If rates rise, TMF is going to look like stocks in 1999.
Doesn't that phenomenon's derivative peak at 0% rates and then start to reduce symmetrically as the rates go to negative? Ie the change from 0.5% to 0% is the same as 0% to -0.5%.
In order for the rate to be negative for existing bonds, people need to pay for the right to own them. Ie, they're still going to pay more. Unless my math is wrong.
I am not arguing that the bond prices won't continue to go up, just stating that the maximum rate of capital price gain per interest rate change (due to convexity) occurs as the yield passes through 0%.

MoneyMarathon
Posts: 556
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon » Tue Aug 13, 2019 10:00 pm

MotoTrojan wrote:
Tue Aug 13, 2019 8:41 pm
These are not two portfolios held separately then added together, they are means of simulating each assets contribution to the portfolio as a whole. If one of them goes up 10x and the other 3x, then the total growth was 30x, not 13x.
Let me try to explain the hand-wavy math I used (but... be warned it might only be more confusing than the original hand waving).

Weighted average rate of returns is a weighted sum of the rate of growth of each investment. Wikipedia page:

https://en.wikipedia.org/wiki/Rate_of_r ... _portfolio

When I set up my little experiment, I calculated a total return (over time) that had an associated CAGR that was tied to a larger amount of capital than what was relevant (e.g., the whole 100% instead of the 40% in UPRO). To get the weighted sum of the rate of growth of each investment, we'd first want to get the CAGR based on each individual smaller amount of capital allocated to the investment. But, if we use these weird, unadjusted whole-portfolio CAGR to get a weighted sum, then the weighted sum: 0.4 * (x / 0.4) + 0.6 * (y / 0.6) = x + y, where x and y are the respective CAGRs of the 40% UPRO/60% CASHZERO and 60% TMF/40% CASHZERO rebalanced portfolios. So the weighted sum for the rate of growth is just x + y of the weird (unadjusted to the actual amount of principal for the individual investment, and instead looking at contribution to the whole portfolio) CAGRs. So expected portfolio CAGR = x + y, with steady growth (and without including any bonus effects from rebalancing negatively correlated investments).

A = P * e ^ (rt) is one expression of the exponential growth formula. And if r = x + y, then:

A = P * e ^ ( (x + y) t) = P * e ^ (x t) * e ^ (y t)

Now if we compute B = P * e ^ (x t) / P = e ^ (x t) and compute C = P * e ^ (y t) / P = e ^ (y t), where B is the total return on cash over the whole time period for the 40% UPRO/60% CASHZERO portfolio and where C is the same thing for 60% TMF/40% CASHZERO, and where P is the original principal, then:

P * B * C = P * e ^ (x t) * e ^ (y t) = P * e ^ ( (x + y) t) = P * e ^ (rt) = A

And to the extent that the observed result is different from P * B * C, that looks like the effect of the 'rebalancing bonus' from negative correlation. Note again that it's larger for the quarterly rebalancing, so the 0.5% CAGR figure that was thrown around does not necessarily apply to quarterly rebalancing. The approximate 0.5% CAGR figure was based on looking at annual rebalancing over the last 32 years. So anyone using quarterly rebalancing may want to include an appropriately larger bonus from rebalancing based on that method.

caklim00
Posts: 1888
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Tue Aug 13, 2019 10:02 pm

I've been in this for about a week or so now. 30K total split 3 ways between
1 - OP Strategy - changing it to 55/45 UPRO/TMF so I can stay with the base strategy; Quarterly rebalance
2 - 20 Day Risk Parity lookback; Monthly rebalance
3 - 20% Volatility lookback over 20 days (weighting recent days higher than less recent days) Monthly rebalance

Right now I'm up 1.2K. I'm going to have to resist the urge to add to this strategy as part of me thinks this is going to end badly.

Lee_WSP
Posts: 919
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

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

Post by Lee_WSP » Tue Aug 13, 2019 10:12 pm

MotoTrojan wrote:
Tue Aug 13, 2019 9:55 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:51 pm
MotoTrojan wrote:
Tue Aug 13, 2019 9:43 pm
Lee_WSP wrote:
Tue Aug 13, 2019 9:39 pm
HEDGEFUNDIE wrote:
Tue Aug 13, 2019 9:36 pm


I agree, but I do think there is a cap on how negative rates can go, it’s probably in the low single negative digits.
True, but the increase in bond fund price is also exponential as rates go lower, so even a single basis point change past zero could mean a 10 or 20% gain in LTT.

If rates rise, TMF is going to look like stocks in 1999.
Doesn't that phenomenon's derivative peak at 0% rates and then start to reduce symmetrically as the rates go to negative? Ie the change from 0.5% to 0% is the same as 0% to -0.5%.
In order for the rate to be negative for existing bonds, people need to pay for the right to own them. Ie, they're still going to pay more. Unless my math is wrong.
I am not arguing that the bond prices won't continue to go up, just stating that the maximum rate of capital price gain per interest rate change (due to convexity) occurs as the yield passes through 0%.
What math dictates that the exponential climb upwards stops at zero?

inatangle
Posts: 5
Joined: Mon Aug 05, 2019 5:14 pm

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

Post by inatangle » Tue Aug 13, 2019 10:42 pm

caklim00 wrote:
Tue Aug 13, 2019 10:02 pm
I've been in this for about a week or so now. 30K total split 3 ways between
1 - OP Strategy - changing it to 55/45 UPRO/TMF so I can stay with the base strategy; Quarterly rebalance
2 - 20 Day Risk Parity lookback; Monthly rebalance
3 - 20% Volatility lookback over 20 days (weighting recent days higher than less recent days) Monthly rebalance

Right now I'm up 1.2K. I'm going to have to resist the urge to add to this strategy as part of me thinks this is going to end badly.
Why do you think this will end badly?

Lee_WSP
Posts: 919
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

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

Post by Lee_WSP » Tue Aug 13, 2019 10:48 pm

inatangle wrote:
Tue Aug 13, 2019 10:42 pm
caklim00 wrote:
Tue Aug 13, 2019 10:02 pm
I've been in this for about a week or so now. 30K total split 3 ways between
1 - OP Strategy - changing it to 55/45 UPRO/TMF so I can stay with the base strategy; Quarterly rebalance
2 - 20 Day Risk Parity lookback; Monthly rebalance
3 - 20% Volatility lookback over 20 days (weighting recent days higher than less recent days) Monthly rebalance

Right now I'm up 1.2K. I'm going to have to resist the urge to add to this strategy as part of me thinks this is going to end badly.
Why do you think this will end badly?
All bull markets die a painful death via bear mauling. As such, we'll all be taking a bath even if only on paper.

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