HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by MotoTrojan »

Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm
Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
I'll switch once I've won the game. No point taking on extra risk for no reason. Otherwise, switching at the top is a valid strategy.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

MotoTrojan wrote: Sat Aug 24, 2019 4:32 pm
RC64 wrote: Sat Aug 24, 2019 12:43 pm
MotoTrojan wrote: Sat Aug 24, 2019 12:10 pm
RC64 wrote: Sat Aug 24, 2019 11:34 am
MotoTrojan wrote: Sat Aug 24, 2019 10:10 am

No matter what fed policy is, equities have infinite upside and long bonds can only go so far without going deeply into negative yields. Policy may be 1982-esque today but yields are not.
If yields went negative, the value of a LTT fund would increase. Why would the negative yield matter if the total return of the bond fund still helps to offset the equities drop?
Do you think it’s more likely that yields go from 15% to 2%, or 2% to -11%? There just isn’t that much price appreciation available without significantly negative yields.
I have no idea what is more likely. Yields are determined by the market, no? Are you saying that a LTT fund total return would essentially be capped? Even so, would it still not be a better choice than an equities fund that is dropping?
Yes, there may be an artificial soft cap on bond returns due to a market desire to avoid deeply negative yields. Equities don’t have this cap. As to your mentions of dropdown greater than S&P500, my 43/57 UPRO/EDV variation is more on par.

I think focusing on the interaction is important but not the full picture. From 1982-present the correlation didn’t really matter, both funds had incredible performance. Rebalancing them with interest free cash showed minimal rebalance bonus in prior posts.
How is it logical that a market driven asset class with a risk premium would have a “soft cap”? If that were the case why would anyone own them? Will LTTs continue to be riskier than short term treasuries? If so, why would there be a market for them if they were not expected to provide a risk premium? And if there was some magic line/negative rate where everyone all the sudden “knew” that LTTs no longer provided a risk premium, wouldn’t the market just sell out of LTTs before they reached that point? LTT returns are driven by market forces, not the fed. The fed, if anything, REACTS to market forces not the other way around. The yield curve is driven negative due to the market and then the fed is essentially forced to lower the short term rates.

My point is, if LTTs are going to be more volatile than short term going forward, and riskier due to the interest rate risk, then they have to provide an expected risk premium. Doesn’t mean that they’ll pan out but the expectation is there just as it is in equities.
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Nickel & Dime
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nickel & Dime »

MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm
Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Thanks! Probably likely that people would swoop in during the stock “sink hole”, and then prop it back up. Probably.

I guess in the back of my mind, nothing is guaranteed. Stocks can go to zero, or so I’ve heard, and a 3X equity fund would seemingly get a head start.

If UPRO went to -99% for example, would people sell out of fear, would people buy if they were in a good position in life no matter what the economy is doing, or would they likely not touch it with a ten foot pole while the economy was in shambles? Or are we confident UPRO could never get to -99%? Could UPRO become a penny stock, lol?

Of course the S & P 500 didn’t exist at the time, but I wonder if UPRO would have survived in the Great Depression?

One last question and I will sign off, how long is everyone keeping their leveraged portfolio...indefinitely?

Thanks all for the great thread!
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Nickel & Dime
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nickel & Dime »

Nickel & Dime wrote: Sat Aug 24, 2019 10:48 pm
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm
Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Thanks! Probably likely that people would swoop in during the stock “sink hole”, and then prop it back up. Probably.

I guess in the back of my mind, nothing is guaranteed. Stocks can go to zero, or so I’ve heard, and a 3X equity fund would seemingly get a head start.

If UPRO went to -99% for example, would people sell out of fear, would people buy if they were in a good position in life no matter what the economy is doing, or would they likely not touch it with a ten foot pole while the economy was in shambles? Or are we confident UPRO could never get to -99%? Could UPRO become a penny stock, lol?

Of course the S & P 500 didn’t exist at the time, but I wonder if UPRO would have survived in the Great Depression?

One last question and I will sign off, how long is everyone keeping their leveraged portfolio...indefinitely?

Thanks all for the great thread!
Oops, according to Wikipedia, S & P started in 1926 with 90 stocks...
BogleBobby
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BogleBobby »

Nickel & Dime wrote: Sat Aug 24, 2019 10:48 pm
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm
Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Thanks! Probably likely that people would swoop in during the stock “sink hole”, and then prop it back up. Probably.

I guess in the back of my mind, nothing is guaranteed. Stocks can go to zero, or so I’ve heard, and a 3X equity fund would seemingly get a head start.

If UPRO went to -99% for example, would people sell out of fear, would people buy if they were in a good position in life no matter what the economy is doing, or would they likely not touch it with a ten foot pole while the economy was in shambles? Or are we confident UPRO could never get to -99%? Could UPRO become a penny stock, lol?

Of course the S & P 500 didn’t exist at the time, but I wonder if UPRO would have survived in the Great Depression?

One last question and I will sign off, how long is everyone keeping their leveraged portfolio...indefinitely?

Thanks all for the great thread!
I'd suggest reading the entire original thread on this strategy to understand it and UPRO better.
Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Lee_WSP »

Kevin M wrote: Wed Aug 14, 2019 1:05 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%.
We can just do some bond math to see what happens as rates drop through 0%.

If yields go negative, the lowest coupon rate would be 0%, since I don't think there's a way to implement a negative coupon rate. I recall someone posting that the minimum coupon rate for a US Treasury is 0.125%, and a negative yield would be implemented by selling the bond at a sufficient premium (price > 100). The results of the math aren't much different for 0% and 0.125% coupon rates, and with a zero-coupon bond, we don't have to factor in coupon return (it's all capital return), so I'll just use a 0% coupon rate.

As someone pointed out, price of a 0% coupon bond at 0% yield is 100--I'll normalize 100 to 1 for use in the PV function to calculate price (and hence return). Continuing to use a constant maturity 25-year bond:

p(0%) =-PV(0%,25,0%,1) = 1.00

To calculate the return for a change of yield from 1% to 0%, we first calculate the price at 1% yield:

p(1%) =-PV(1%,25,0%,1) = 0.78

Then we calculate the return as:

r(1%->0%) = p(0%) / p(1%) - 1 = 1.00 / 0.78 = 28.2%

Similarly, to calculate the return for 0% -> -1%, we first calculate the price at -1% yield:

p(-1%) =-PV(-1%,25,0%,1) = 1.286,

and the return for 0% to -1% is:

r(0%->-1%) = 1.286/1.000 - 1 = 28.6%

So 28.6% is a little higher than 28.2%, but not that much higher.

Doing similar calculations for all one-percentage-point changes from 10%->9% to -9%->-10%, and graphing the results, we get this:

Image

So as yields drop, return increases with slight curvature, but pretty close to linear, and nothing special happens at 0% yield.

Kevin
People keep bringing up the rates going to zero and I was going to point them to this post and try to replicate the results.

However, I did some googling and came across this equation from Fidelity. Does the PV function do the same math?

Image

Source: https://www.fidelity.com/learning-cente ... -relations

P.S. Fidelity also published this image of bond fund principal value to interest rate chart.
Image
Last edited by Lee_WSP on Sun Aug 25, 2019 1:18 am, edited 1 time in total.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

^-- this post is very informative thank you for reposting it. I keep thinking that maybe we should be comparing the concept of essentially 0% LTT yields with the falling yields in the equity market? Ie growth stocks. Investors buy growth stocks because they expect price appreciation. If investors expect that the global economy is going to continue to rely on an ever-cheaper monetary supply to stimulate the economy then perhaps they expect further price appreciation in LTTs, regardless of what the yield is.
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Nickel & Dime
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nickel & Dime »

BogleBobby wrote: Sat Aug 24, 2019 11:12 pm
Nickel & Dime wrote: Sat Aug 24, 2019 10:48 pm
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm

An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Thanks! Probably likely that people would swoop in during the stock “sink hole”, and then prop it back up. Probably.

I guess in the back of my mind, nothing is guaranteed. Stocks can go to zero, or so I’ve heard, and a 3X equity fund would seemingly get a head start.

If UPRO went to -99% for example, would people sell out of fear, would people buy if they were in a good position in life no matter what the economy is doing, or would they likely not touch it with a ten foot pole while the economy was in shambles? Or are we confident UPRO could never get to -99%? Could UPRO become a penny stock, lol?

Of course the S & P 500 didn’t exist at the time, but I wonder if UPRO would have survived in the Great Depression?

One last question and I will sign off, how long is everyone keeping their leveraged portfolio...indefinitely?

Thanks all for the great thread!
I'd suggest reading the entire original thread on this strategy to understand it and UPRO better.
I have been following this from the beginning, but thanks for the tip!
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

Nickel & Dime wrote: Sat Aug 24, 2019 10:48 pm
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Nickel & Dime wrote: Sat Aug 24, 2019 9:47 pm
HEDGEFUNDIE wrote: Sat Aug 24, 2019 9:14 pm
Nickel & Dime wrote: Sat Aug 24, 2019 8:52 pm I have a 33% UPRO 67% EDV mix going, which has a .350 expense ratio. It seems a little more wholesome with EDV in my opinion.
One thing I wonder though, and I believe this has been mentioned previously in the first adventure, is what is the trigger point to begin to allocate to a regular 1X fund if UPRO has a huge drawdown? What is the breaking point? -60% or -80%? Does anyone have a plan for this? Or is everyone keeping UPRO to the bitter end?
An 80% drawdown is the absolute worst time to be selling out of UPRO.
Ok, fair enough, thanks! So it would have to kick the bucket completely, then you would rebalance into something else for equities, correct?
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Thanks! Probably likely that people would swoop in during the stock “sink hole”, and then prop it back up. Probably.

I guess in the back of my mind, nothing is guaranteed. Stocks can go to zero, or so I’ve heard, and a 3X equity fund would seemingly get a head start.

If UPRO went to -99% for example, would people sell out of fear, would people buy if they were in a good position in life no matter what the economy is doing, or would they likely not touch it with a ten foot pole while the economy was in shambles? Or are we confident UPRO could never get to -99%? Could UPRO become a penny stock, lol?

Of course the S & P 500 didn’t exist at the time, but I wonder if UPRO would have survived in the Great Depression?

One last question and I will sign off, how long is everyone keeping their leveraged portfolio...indefinitely?

Thanks all for the great thread!
UPRO would’ve had a monthly drawdown of 97%, and daily it probably got awfully close to 99%, during the financial crisis. This is why you need another asset, ideally one that could increase when equities crash. It did what it’s supposed to. Other 2x funds have been around since the late 90’s.
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Kevin M
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Kevin M »

privatefarmer wrote: Sat Aug 24, 2019 10:44 pm How is it logical that a market driven asset class with a risk premium would have a “soft cap”? If that were the case why would anyone own them? Will LTTs continue to be riskier than short term treasuries? If so, why would there be a market for them if they were not expected to provide a risk premium?
<snip>
My point is, if LTTs are going to be more volatile than short term going forward, and riskier due to the interest rate risk, then they have to provide an expected risk premium.<snip>
I think it's been discussed in this thread or its precursor, but there are a couple of well-respected models that indicate that the risk premium in all but the shortest-term Treasuries has been negative lately.

It's even more obvious now than when discussed previously. With the 30y yield at 2.02%, the 20y at 1.82%, and the 1m at 2.07%, where is the term risk premium?

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

Post by Kevin M »

Lee_WSP wrote: Sat Aug 24, 2019 11:35 pm
Kevin M wrote: Wed Aug 14, 2019 1:05 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%.
We can just do some bond math to see what happens as rates drop through 0%.
<snip>
People keep bringing up the rates going to zero and I was going to point them to this post and try to replicate the results.

However, I did some googling and came across this equation from Fidelity. Does the PV function do the same math?

Image

Source: https://www.fidelity.com/learning-cente ... -relations
Yes, the image is showing the math behind the PV (Present Value) function. The PRICE function also can be used, but PV is more convenient sometimes.
P.S. Fidelity also published this image of bond fund principal value to interest rate chart.
Image
OK. That chart, or something similar, is easy to replicate in a spreadsheet with PV or PRICE.

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

Post by LadyGeek »

The wiki uses PV(): Bond pricing
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Kevin M »

Kevin M wrote: Sun Aug 25, 2019 2:57 pm
Lee_WSP wrote: Sat Aug 24, 2019 11:35 pm Image
OK. That chart, or something similar, is easy to replicate in a spreadsheet with PV or PRICE.
To demonstrate, here are the calculations for 8%, 9% and 10% yields, using PV and my preferred approach of using FV = 1 so I can simply enter coupon rate as PMT.

1.06710 = -PV(8%,10,9%,1)
1.00000 = -PV(9%,10,9%,1)
0.93855 = -PV(10%,10,9%,1)

Multiply by 1,000 to get the exact values shown in the Fidelity table.

Or using PRICE:

106.6710 = PRICE("1/1/2000", "1/1/2010", 9%, 8%, 100, 1)
etc.

Multiply by 10 to get the Fidelity value.

Fidelity uses par value of $1,000 since bonds typically are sold in $1,000 face value increments. Bond prices typically are quoted as par = 100 (100% of face value), which is the convention used in PRICE.

Fidelity also assume annual coupon payments, as do I for first-order conceptual modeling. Bonds typically pay coupons semi-annually, so for more accurate results, semi-annual payments would be used in the formulas.

Kevin
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assetalloc
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by assetalloc »

MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Leverage strategies look tempting when you mix the bullish US stock market and Bullish Long term treasuries. But it is a sucker's game. What will happen when you have a repeat of 2000 or 2008 - that is several years of recovery for US stock market?

For the sake of "what if" Look at emerging market ETF: EDC - if you timed it imperfectly, that is buy in 2011, you'd have lost over 80% of the value. No matter which uncorrelated fund you pick to data mine, it would be 8-9 years of pain and more. Are you willing to live through that long of pain if it happens to US stock market or Bonds? Wearing my poker hat, probability looks pretty high of one of these 2 shoes falling in next 5 years.

I see a fundamental problem with portfolios constructed with 20/20 vision into history.

I have dabbled with backtested stock trading strategies in my investment career. All of these fail, and bogleheads start to look very good returns when you lose it all in trading.

In my young days I always questioned if everyone knows about lazy portfolios, what will happen to portfolio theories? The efficient market theory still works well due to new financial instruments invented by MBAs.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

assetalloc wrote: Mon Aug 26, 2019 10:06 am
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Leverage strategies look tempting when you mix the bullish US stock market and Bullish Long term treasuries. But it is a sucker's game. What will happen when you have a repeat of 2000 or 2008 - that is several years of recovery for US stock market?

For the sake of "what if" Look at emerging market ETF: EDC - if you timed it imperfectly, that is buy in 2011, you'd have lost over 80% of the value. No matter which uncorrelated fund you pick to data mine, it would be 8-9 years of pain and more. Are you willing to live through that long of pain if it happens to US stock market or Bonds? Wearing my poker hat, probability looks pretty high of one of these 2 shoes falling in next 5 years.

I see a fundamental problem with portfolios constructed with 20/20 vision into history.

I have dabbled with backtested stock trading strategies in my investment career. All of these fail, and bogleheads start to look very good returns when you lose it all in trading.

In my young days I always questioned if everyone knows about lazy portfolios, what will happen to portfolio theories? The efficient market theory still works well due to new financial instruments invented by MBAs.
What happens is the 3x or 2x daily loses and gains of the buy and hold strategy are realized. While it's got greater downside, it has greater upside as well. These aren't margin accounts.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

assetalloc wrote: Mon Aug 26, 2019 10:06 am
MotoTrojan wrote: Sat Aug 24, 2019 9:50 pm
Sure if the fund vanished to exist we'd find something else, but why do you think this would be the case? If anything it would have more interest after a drawdown as a bunch of speculators flood in hoping to ride the leveraged rebound.
Leverage strategies look tempting when you mix the bullish US stock market and Bullish Long term treasuries. But it is a sucker's game. What will happen when you have a repeat of 2000 or 2008 - that is several years of recovery for US stock market?

For the sake of "what if" Look at emerging market ETF: EDC - if you timed it imperfectly, that is buy in 2011, you'd have lost over 80% of the value. No matter which uncorrelated fund you pick to data mine, it would be 8-9 years of pain and more. Are you willing to live through that long of pain if it happens to US stock market or Bonds? Wearing my poker hat, probability looks pretty high of one of these 2 shoes falling in next 5 years.

I see a fundamental problem with portfolios constructed with 20/20 vision into history.

I have dabbled with backtested stock trading strategies in my investment career. All of these fail, and bogleheads start to look very good returns when you lose it all in trading.

In my young days I always questioned if everyone knows about lazy portfolios, what will happen to portfolio theories? The efficient market theory still works well due to new financial instruments invented by MBAs.
EM is much more volatile than US equities and that hurts a leveraged daily rebalancing fund.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by assetalloc »


What happens is the 3x or 2x daily loses and gains of the buy and hold strategy are realized. While it's got greater downside, it has greater upside as well. These aren't margin accounts.
So you are saying that net loss will be offset the net gain. So it means it should match market returns over long term minus the fees & trading costs these etfs pay :beer :confused

Stay lucky & enjoy the ride. BTW if you are bullish, why not to trade options on S&P & TLT?
Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

assetalloc wrote: Mon Aug 26, 2019 5:18 pm

What happens is the 3x or 2x daily loses and gains of the buy and hold strategy are realized. While it's got greater downside, it has greater upside as well. These aren't margin accounts.
So you are saying that net loss will be offset the net gain. So it means it should match market returns over long term minus the fees & trading costs these etfs pay :beer :confused

Stay lucky & enjoy the ride. BTW if you are bullish, why not to trade options on S&P & TLT?
I didn't say that at all.

Because if a margin bet goes wrong, you get a margin call. If a leveraged ETF goes down. It just goes down.

Most options that expire, expire worthless. Options are a bet against a counterparty. Options are a zero sum game and in that game, I'm most certainly the mark.

LETF's would take 35 straight 25% (3x 8.33%) declines to go to $.01 and probably be closed out due to it's value being under a penny. But in such a scenario, the S&P 500 would also be worth near zero dollars; going from say 3,000 down to 220.
Last edited by Lee_WSP on Mon Aug 26, 2019 5:31 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HawkeyePierce »

I would also expect options to be even more path-dependent than daily leveraged ETFs.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

HawkeyePierce wrote: Mon Aug 26, 2019 5:30 pm I would also expect options to be even more path-dependent than daily leveraged ETFs.
They can be used in a way that there is little path dependence.
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Because if a margin bet goes wrong, you get a margin call. If a leveraged ETF goes down. It just goes down.
This is solved by establishing leverage-rebalancing either from time period (i.e. every month) or losses (after a 20% loss). For instance, 2:1 leverage would have never encountered a margin call historically if rebalanced monthly.
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Options are a bet against a counterparty. Options are a zero sum game and in that game, I'm most certainly the mark.
What about futures? Would those be OK in your book or are they also just counterparty bets and a zero-sum game?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by butricksaid »

305pelusa wrote: Mon Aug 26, 2019 5:41 pm What about futures? Would those be OK in your book or are they also just counterparty bets and a zero-sum game?
https://lmgtfy.com/?q=are+future+contracts+zero+sum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 5:41 pm
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Because if a margin bet goes wrong, you get a margin call. If a leveraged ETF goes down. It just goes down.
This is solved by establishing leverage-rebalancing either from time period (i.e. every month) or losses (after a 20% loss). For instance, 2:1 leverage would have never encountered a margin call historically if rebalanced monthly.
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Options are a bet against a counterparty. Options are a zero sum game and in that game, I'm most certainly the mark.
What about futures? Would those be OK in your book or are they also just counterparty bets and a zero-sum game?
Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.

Futures contracts for commodities you need for business or actually want (like a layaway program) make perfect sense. Speculating on future price movements does not.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rascott »

305pelusa wrote: Mon Aug 26, 2019 5:41 pm
HawkeyePierce wrote: Mon Aug 26, 2019 5:30 pm I would also expect options to be even more path-dependent than daily leveraged ETFs.
They can be used in a way that there is little path dependence.
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Because if a margin bet goes wrong, you get a margin call. If a leveraged ETF goes down. It just goes down.
This is solved by establishing leverage-rebalancing either from time period (i.e. every month) or losses (after a 20% loss). For instance, 2:1 leverage would have never encountered a margin call historically if rebalanced monthly.
Lee_WSP wrote: Mon Aug 26, 2019 5:22 pm Options are a bet against a counterparty. Options are a zero sum game and in that game, I'm most certainly the mark.
What about futures? Would those be OK in your book or are they also just counterparty bets and a zero-sum game?
I think futures are preferable to LETFs.... but it does require a good bit more work to get your proper allocations setup. Pls they are likely too large a position for many. The new micro contracts would work nicely for the equities, but there are no similar sized bond offerings
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Speculating on future price movements does not.
So just to confirm, you are OK with futures but not options correct? The reasons you've given:
- Options require margin accounts
- Options are a zero-sum game
- Options are speculation on future price movements

Did I get this right so far?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 7:29 pm
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Speculating on future price movements does not.
So just to confirm, you are OK with futures but not options correct? The reasons you've given:
- Options require margin accounts
- Options are a zero-sum game
- Options are speculation on future price movements

Did I get this right so far?
I'm only personally OK with futures if I'm actually buying the commodity because you're a business. Ie, the grocery store buying a futures contract for green beans. Or say I wanted to guarantee the price on NAOH next year because of the tariffs.

What everyone else does with their own money is their own business as long as it's not fundamentally evil or something bad like that.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 7:33 pm
305pelusa wrote: Mon Aug 26, 2019 7:29 pm
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Speculating on future price movements does not.
So just to confirm, you are OK with futures but not options correct? The reasons you've given:
- Options require margin accounts
- Options are a zero-sum game
- Options are speculation on future price movements

Did I get this right so far?
I'm only personally OK with futures if I'm actually buying the commodity because you're a business. Ie, the grocery store buying a futures contract for green beans. Or say I wanted to guarantee the price on NAOH next year because of the tariffs.

What everyone else does with their own money is their own business as long as it's not fundamentally evil or something bad like that.
Ah OK I understand. So futures on the S&P 500, you disagree with? Presumably due to the same reasons I outline above for options?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 7:35 pm
Lee_WSP wrote: Mon Aug 26, 2019 7:33 pm
305pelusa wrote: Mon Aug 26, 2019 7:29 pm
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Speculating on future price movements does not.
So just to confirm, you are OK with futures but not options correct? The reasons you've given:
- Options require margin accounts
- Options are a zero-sum game
- Options are speculation on future price movements

Did I get this right so far?
I'm only personally OK with futures if I'm actually buying the commodity because you're a business. Ie, the grocery store buying a futures contract for green beans. Or say I wanted to guarantee the price on NAOH next year because of the tariffs.

What everyone else does with their own money is their own business as long as it's not fundamentally evil or something bad like that.
Ah OK I understand. So futures on the S&P 500, you disagree with? Presumably due to the same reasons I outline above for options?
Because they're zero sum games bet against the gain or decline of an underlying asset at certain price point at a single point in time, yes. But they have their uses for other people. Just not me.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 7:39 pm
305pelusa wrote: Mon Aug 26, 2019 7:35 pm
Lee_WSP wrote: Mon Aug 26, 2019 7:33 pm
305pelusa wrote: Mon Aug 26, 2019 7:29 pm
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Yes, which is exactly what these leveraged funds do. Which is why we prefer them to margin accounts. Among other reasons.
Lee_WSP wrote: Mon Aug 26, 2019 6:53 pm Speculating on future price movements does not.
So just to confirm, you are OK with futures but not options correct? The reasons you've given:
- Options require margin accounts
- Options are a zero-sum game
- Options are speculation on future price movements

Did I get this right so far?
I'm only personally OK with futures if I'm actually buying the commodity because you're a business. Ie, the grocery store buying a futures contract for green beans. Or say I wanted to guarantee the price on NAOH next year because of the tariffs.

What everyone else does with their own money is their own business as long as it's not fundamentally evil or something bad like that.
Ah OK I understand. So futures on the S&P 500, you disagree with? Presumably due to the same reasons I outline above for options?
Because they're zero sum games bet against the gain or decline of an underlying asset at certain price point at a single point in time, yes. But they have their uses for other people. Just not me.
So why are you OK with credit swaps?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

If you are referring to the ETF's in the excellent adventure, you're individually buying an ETF. You pay the management fee & interest rate to the firm to manage the fund. They have the big bucks and the big brains. Why wouldn't I leverage that?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 7:58 pm If you are referring to the ETF's in the excellent adventure, you're individually buying an ETF. You pay the management fee & interest rate to the firm to manage the fund. They have the big bucks and the big brains. Why wouldn't I leverage that?
Oh I don't know, perhaps because credit swaps are also zero-sum games that are simply bets on the gains or losses of an underlying asset.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 8:02 pm
Lee_WSP wrote: Mon Aug 26, 2019 7:58 pm If you are referring to the ETF's in the excellent adventure, you're individually buying an ETF. You pay the management fee & interest rate to the firm to manage the fund. They have the big bucks and the big brains. Why wouldn't I leverage that?
Oh I don't know, perhaps because credit swaps are also zero-sum games that are simply bets on the gains or losses of an underlying asset.
Are you being serious or just trolling?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 8:26 pm
305pelusa wrote: Mon Aug 26, 2019 8:02 pm
Lee_WSP wrote: Mon Aug 26, 2019 7:58 pm If you are referring to the ETF's in the excellent adventure, you're individually buying an ETF. You pay the management fee & interest rate to the firm to manage the fund. They have the big bucks and the big brains. Why wouldn't I leverage that?
Oh I don't know, perhaps because credit swaps are also zero-sum games that are simply bets on the gains or losses of an underlying asset.
Are you being serious or just trolling?
I'm 100% serious. I don't understand why you're against options and futures (saying they are zero-sum games and bets on an underlying asset change), yet will gladly put money in funds that use credit swaps.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by assetalloc »


EM is much more volatile than US equities and that hurts a leveraged daily rebalancing fund.
I disagree that EM's just volatility has impact on leveraged rebalancing, its matter of volatility in any asset class including US stock market and bonds.

Since 2004, EEM has handily outperformed its 3X leveraged index. That's 15 years of underperformance. Several posters on this forum can remember that in 2006/2007 EEM was the place to invest much better than US stock market. I am not surprised, the 20/20 market timers are tooting USA stock market and Bonds 3X investments :-) :twisted:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 8:32 pm
Lee_WSP wrote: Mon Aug 26, 2019 8:26 pm
305pelusa wrote: Mon Aug 26, 2019 8:02 pm
Lee_WSP wrote: Mon Aug 26, 2019 7:58 pm If you are referring to the ETF's in the excellent adventure, you're individually buying an ETF. You pay the management fee & interest rate to the firm to manage the fund. They have the big bucks and the big brains. Why wouldn't I leverage that?
Oh I don't know, perhaps because credit swaps are also zero-sum games that are simply bets on the gains or losses of an underlying asset.
Are you being serious or just trolling?
I'm 100% serious. I don't understand why you're against options and futures (saying they are zero-sum games and bets on an underlying asset change), yet will gladly put money in funds that use credit swaps.
I feel like I'm repeating myself, but I'll try to explain it differently.

The only reason I'm personally not going to use options is because it's me against big banks. By betting on the ETF, I'm betting on the large institution, not against it, and the fund will work as advertised.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Lee_WSP wrote: Mon Aug 26, 2019 9:20 pm I feel like I'm repeating myself, but I'll try to explain it differently.
It would help me if you didn't change your mind every other post. Because first you're telling me options are a bad idea in your opinion because they're a zero sum game, speculation on price movements and a counterparty bet.

I then confirm it to make sure I got that right:
Lee_WSP wrote: Mon Aug 26, 2019 7:39 pm
305pelusa wrote: Mon Aug 26, 2019 8:32 pm So futures on the S&P 500, you disagree with? Presumably due to the same reasons I outline above for options?
Because they're zero sum games bet against the gain or decline of an underlying asset at certain price point at a single point in time, yes. But they have their uses for other people. Just not me.
But NOW you're telling me:
Lee_WSP wrote: Mon Aug 26, 2019 9:20 pm The only reason I'm personally not going to use options is because it's me against big banks.
You literally were asked:
assetalloc wrote: Mon Aug 26, 2019 5:18 pm BTW if you are bullish, why not to trade options on S&P & TLT?
Why didn't you just say "because it's me against big banks"? That IS the only reason you won't use them no? Instead you talked about them being a zero-sum game, counterparty bets, expirations, etc, as though the options fundamentally aren't a good choice.

So no, I wasn't trolling. Just trying to understand your posts. Any ways, it's clear now. We can move along.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

305pelusa wrote: Mon Aug 26, 2019 9:45 pm Why didn't you just say "because it's me against big banks"? That IS the only reason you won't use them no? Instead you talked about them being a zero-sum game, counterparty bets, expirations, etc, as though the options fundamentally aren't a good choice.

So no, I wasn't trolling. Just trying to understand your posts. Any ways, it's clear now. We can move along.
Because I did. You just glossed over the part where I said I was the patsy in this game. These people are paid extremely well to be excellent at their job. This isn't even close to my job.

If I was the poker shark, I'd be playing poker 24/7 scooping up :moneybag left and right. But I'm not. And I'm not an options trader either.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by coingaroo »

ocrtech wrote: Mon Aug 12, 2019 5:09 pm
HEDGEFUNDIE wrote: Mon Aug 12, 2019 3:12 pm
ocrtech wrote: Mon Aug 12, 2019 3:03 pm I was curious how sensitive the cumulative results and drawdowns were to adjustments in the fixed AA allocation in OPs approach. I also wanted to compare that to the Inverse Volatility (Risk Parity) and Target Volatility approaches. The graphs below are based on the 1986-2019 simulated data supplemented with results through the end of July 2019. Each approach was run 20 times with daily data shifted by one day per run. Monthly rebalancing was performed for all approaches. Inverse Volatility is capped at the UPRO % allocation. Target Volatility is 20% target and UPRO is capped at UPRO % allocation.

Image

Image

In the backtest, OPs shift in allocation reduced his cumulative returns by about -6%(-75k) but increased his max drawdown from 46% to 61%.
How about starting the simulation at July 2012, the first time long rates were this low.
Here you go. Same constraints aside from the time period which is now July 2012 through the end of July 2019. I guess the question is, how confident are you that this 7 year slice is indicative of what the next 20 years will be like. If you are wrong, the drawdowns are likely to be brutal.

Image

Image

This is what the drawdowns look like with all approaches set to a cap of 55% UPRO on a time period of May 1986 - July 2019.

Image


What tool are you using to plot these numbers?
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by ocrtech »

coingaroo wrote: Tue Aug 27, 2019 6:12 am
What tool are you using to plot these numbers?
I used Excel to plot the graphs. To generate the data, I'm using some code I wrote in VBA and C#.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

assetalloc wrote: Mon Aug 26, 2019 8:41 pm

EM is much more volatile than US equities and that hurts a leveraged daily rebalancing fund.
I disagree that EM's just volatility has impact on leveraged rebalancing, its matter of volatility in any asset class including US stock market and bonds.

Since 2004, EEM has handily outperformed its 3X leveraged index. That's 15 years of underperformance. Several posters on this forum can remember that in 2006/2007 EEM was the place to invest much better than US stock market. I am not surprised, the 20/20 market timers are tooting USA stock market and Bonds 3X investments :-) :twisted:
Can you help me understand why you don't think increased volatility will generate more volatility decay on a daily-rebalanced holding? This is why unleveraged EM can be flat, or even positive, and the 3x index can show steady declines. There are also other forces at play which increase drag even beyond the intended index for the actual funds; I haven't compared an EM one, but DZk has about a 3% drag that was unexplained by the index itself.

Using data from 1955 is market timing? What is everyone else using?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BogleBobby »

So I'm going to be joining this excellent adventure, but applying it a little differently:

1) I am not placing these funds in a separate "fun money" account, but it will be a part of my overall portfolio. This means that my rebalancing occurs with my entire portfolio.
2) I'll be making contributions each year to the account since I'm in the 'accumulation' phase of my life.

My asset allocation seems to change everyday, but right now I'm planning on the following allocation:

55% World Stock Holdings (unleveraged)
30% UPRO
7.5% EDV
7.5% TLT

When I get to be 50% towards my retirement number, I will switch to the following allocation:

65% World Stock Holdings (unleveraged)
20% Total US Bond Market
15% UPRO

A couple of thoughts of how I got here:
- I am not bullish on bonds, but also consider them an important part of the strategy. When I have a lot of UPRO holdings, I want EDV and TLT to help temper UPRO losses. I didn't go for TMF because EDV has similar returns with no leverage. I didn't go fully for EDV because TLT provides more stability which backtesting liked.
- When I get more towards retirement and have a larger account value, I have to deleverage. That's when I will hold less UPRO and start protecting my capital with a bond market (and building a bond tent).

The allocation was based on backtesting data from 1955-2018. I also looked at data from 1871 to get a feel of how stocks/bonds performed in the past. I didn't try to optimize CAGR, but instead optimized the number of years until retirement. I also considered my risk tolerance (because holding more UPRO is actually better, but decided to hold less due to risk tolerance).

The only thing I don't like about my current asset allocation is the over dependence on the SP500. I could allocate some portion to DZK, but haven't decided to pull that trigger yet.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

BogleBobby wrote: Tue Aug 27, 2019 12:59 pm So I'm going to be joining this excellent adventure, but applying it a little differently:

1) I am not placing these funds in a separate "fun money" account, but it will be a part of my overall portfolio. This means that my rebalancing occurs with my entire portfolio.
2) I'll be making contributions each year to the account since I'm in the 'accumulation' phase of my life.

My asset allocation seems to change everyday, but right now I'm planning on the following allocation:

55% World Stock Holdings (unleveraged)
30% UPRO
7.5% EDV
7.5% TLT

When I get to be 50% towards my retirement number, I will switch to the following allocation:

65% World Stock Holdings (unleveraged)
20% Total US Bond Market
15% UPRO

A couple of thoughts of how I got here:
- I am not bullish on bonds, but also consider them an important part of the strategy. When I have a lot of UPRO holdings, I want EDV and TLT to help temper UPRO losses. I didn't go for TMF because EDV has similar returns with no leverage. I didn't go fully for EDV because TLT provides more stability which backtesting liked.
- When I get more towards retirement and have a larger account value, I have to deleverage. That's when I will hold less UPRO and start protecting my capital with a bond market (and building a bond tent).

The allocation was based on backtesting data from 1955-2018. I also looked at data from 1871 to get a feel of how stocks/bonds performed in the past. I didn't try to optimize CAGR, but instead optimized the number of years until retirement. I also considered my risk tolerance (because holding more UPRO is actually better, but decided to hold less due to risk tolerance).

The only thing I don't like about my current asset allocation is the over dependence on the SP500. I could allocate some portion to DZK, but haven't decided to pull that trigger yet.
Interesting choice. I haven't played in Simba but this did pretty poorly from 1997-present on a quick PV spot-check. I also would ditch the TLT and just hold EDV, perhaps with more unleveraged equities and less UPRO to maintain the same overall exposure. This would reduce volatility drag and expenses and boost overall efficiency. You could also hold more unleveraged International and less (or no) unleveraged S&P500 if you want to reduce your dependence there.

Siamond showed that DZK had a ~3% drag beyond it's ideal index, so I would use caution for a buy & hold approach with that fund. UPRO does WAY better at tracking it's index.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Njm8845 »

Forgive the basic question, but I always thought leveraged etfs were dangerous because they only seek to return a multiple DAILY.

My understanding is that they don’t do well long term, especially when there’s excess volatility.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

Njm8845 wrote: Tue Aug 27, 2019 2:35 pm Forgive the basic question, but I always thought leveraged etfs were dangerous because they only seek to return a multiple DAILY.

My understanding is that they don’t do well long term, especially when there’s excess volatility.
This is addressed in the OP of Part I. MoneyMarathon also did an awesome job of showing how rebalancing against an imperfectly correlated asset reduces the volatility decay. Imagine you rebalanced daily to 33.3% UPRO and the rest in cash, that would perfectly match the S&P500 except for the expense ratio, borrowing costs, and interest earned on the cash. Rebalancing weekly will have more decay but be far better than buy & hold, and so on. This is a trade-off with a desire to get some momentum from letting things ride, and transaction costs, hence why many people have settled on quarterly rebalance. When holding >33% UPRO you also can get larger drawdowns if you rebalance too frequently during a decline.

They don't do well held alone, but when used as part of a portfolio they have a place. They actually work better during long up or down trends but can get hurt in flatter markets with high volatility. For example, since inception UPRO has actually returned closer to 5x the unleveraged S&P500, rather than 3x minus expenses. Futures can give you more direct leverage without the volatility decay, but have their own issues especially for smaller portfolios.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by butricksaid »

BogleBobby wrote: Tue Aug 27, 2019 12:59 pm So I'm going to be joining this excellent adventure, but applying it a little differently:

1) I am not placing these funds in a separate "fun money" account, but it will be a part of my overall portfolio. This means that my rebalancing occurs with my entire portfolio.
2) I'll be making contributions each year to the account since I'm in the 'accumulation' phase of my life.

My asset allocation seems to change everyday, but right now I'm planning on the following allocation:

55% World Stock Holdings (unleveraged)
30% UPRO
7.5% EDV
7.5% TLT

When I get to be 50% towards my retirement number, I will switch to the following allocation:

65% World Stock Holdings (unleveraged)
20% Total US Bond Market
15% UPRO

A couple of thoughts of how I got here:
- I am not bullish on bonds, but also consider them an important part of the strategy. When I have a lot of UPRO holdings, I want EDV and TLT to help temper UPRO losses. I didn't go for TMF because EDV has similar returns with no leverage. I didn't go fully for EDV because TLT provides more stability which backtesting liked.
- When I get more towards retirement and have a larger account value, I have to deleverage. That's when I will hold less UPRO and start protecting my capital with a bond market (and building a bond tent).

The allocation was based on backtesting data from 1955-2018. I also looked at data from 1871 to get a feel of how stocks/bonds performed in the past. I didn't try to optimize CAGR, but instead optimized the number of years until retirement. I also considered my risk tolerance (because holding more UPRO is actually better, but decided to hold less due to risk tolerance).

The only thing I don't like about my current asset allocation is the over dependence on the SP500. I could allocate some portion to DZK, but haven't decided to pull that trigger yet.
I'm still unclear on how EDV has similar returns to TMF. When I compare the two on different historical charts, I still substantial outperformance of the latter. I don't fully grasp how the 3-month LIBOR and other factors come into play (plus ~1% expense ratio) but at the end of the day, the ticker's (TMF) value still goes up by a larger percentage over time compared to EDV.
caklim00
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by caklim00 »

butricksaid wrote: Tue Aug 27, 2019 2:52 pm I'm still unclear on how EDV has similar returns to TMF. When I compare the two on different historical charts, I still substantial outperformance of the latter. I don't fully grasp how the 3-month LIBOR and other factors come into play (plus ~1% expense ratio) but at the end of the day, the ticker's (TMF) value still goes up by a larger percentage over time compared to EDV.
I'm wondering the same thing. When I check the 10 year returns on M* I get
TMF +16,727.01 | +167.27% EDV +3,996.03 | +39.96% × TLT +4,821.57 | +48.22% ×

It looks like EDV and TLT hug each other fairly closely with TLT always maintaining an edge over EDV. Note: I'm interested in this right now since I'm thinking about adding a 4th piece of the pie using Mototrojan's 43/57 UPRO/EDV.
wise_magus
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by wise_magus »

MotoTrojan wrote: Tue Aug 27, 2019 2:39 pm This is addressed in the OP of Part I. MoneyMarathon also did an awesome job of showing how rebalancing against an imperfectly correlated asset reduces the volatility decay. Imagine you rebalanced daily to 33.3% UPRO and the rest in cash, that would perfectly match the S&P500 except for the expense ratio, borrowing costs, and interest earned on the cash. Rebalancing weekly will have more decay but be far better than buy & hold, and so on. This is a trade-off with a desire to get some momentum from letting things ride, and transaction costs, hence why many people have settled on quarterly rebalance. When holding >33% UPRO you also can get larger drawdowns if you rebalance too frequently during a decline.

They don't do well held alone, but when used as part of a portfolio they have a place. They actually work better during long up or down trends but can get hurt in flatter markets with high volatility. For example, since inception UPRO has actually returned closer to 5x the unleveraged S&P500, rather than 3x minus expenses. Futures can give you more direct leverage without the volatility decay, but have their own issues especially for smaller portfolios.
I understand this part about decreasing the loss due to volatility decay using rebalancing, but I have a related question that I didn't see addressed (I did read most of part 2 and some of part 1).

Let's say we've decided to stick with a 50/50 allocation for simplicity. So one might do 50% UPRO and 50% TMF with quarterly rebalancing. As everyone knows, one of the sources of inefficiency is the volatility decay caused by daily rebalancing.

Volatility decay causes losses when the index being tracked is volatile. SPY and TLT are both quite volatile. But the portfolio of 50/50 SPY/TLT is much less volatile. Would this strategy be better implemented by a product that held a 3x leveraged version of the 50/50 SPY/TLT portfolio, reset daily? I know there's no such ETF in the market right now, but if a provider were to introduce such a product, would that be better than quarterly rebalanced UPRO/TMF?
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

caklim00 wrote: Tue Aug 27, 2019 3:03 pm
butricksaid wrote: Tue Aug 27, 2019 2:52 pm I'm still unclear on how EDV has similar returns to TMF. When I compare the two on different historical charts, I still substantial outperformance of the latter. I don't fully grasp how the 3-month LIBOR and other factors come into play (plus ~1% expense ratio) but at the end of the day, the ticker's (TMF) value still goes up by a larger percentage over time compared to EDV.
I'm wondering the same thing. When I check the 10 year returns on M* I get
TMF +16,727.01 | +167.27% EDV +3,996.03 | +39.96% × TLT +4,821.57 | +48.22% ×

It looks like EDV and TLT hug each other fairly closely with TLT always maintaining an edge over EDV. Note: I'm interested in this right now since I'm thinking about adding a 4th piece of the pie using Mototrojan's 43/57 UPRO/EDV.
Since inception EDV has outperformed TLT. VEDTX is the mutual fund version and has been around a bit longer and using that in PV you'll see even more outperformance since inception. Since 1982, when rates started dropping, EDV would've crushed TLT, but of course TMF would've been the champion.

I never said EDV had similar returns to TMF, but it does have more duration exposure than TLT (about 1/2 of TMF, or 1.5x TLT). Thus it is a way to get some "leverage" without any of the high expenses, interest, or volatility decay of TMF. It is less duration exposure than TMF, hence why I use 43/57 UPRO/EDV. 55/45 UPRO/EDV would have less flight-to-safety protection in a downturn.

It is easier to think about daily returns. In a completely flat yield curve (from 3-month libor that TMF borrows from, to 20 and 30 year bonds) TLT, EDV, and TMF will all provide the same amount of income (TMF provides 3x TLT - 2x libor, which in this example is just 1x TLT). In one day of trading, if TLT goes up 1% due to dropping rates, EDV would go up ~1.5% and TMF 3%. If TLT goes down 1%, the others would follow.

With a steeper yield curve you'll get a similar change in daily prices, with EDV providing more income that TLT, and TMF's income being somewhere around EDV (higher or lower) depending on how libor compares to the 20 year. I think the flat yield curve example (similar to today's situation anyways) makes it a lot more clear how they all compare though.
Last edited by MotoTrojan on Tue Aug 27, 2019 3:52 pm, edited 2 times in total.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

wise_magus wrote: Tue Aug 27, 2019 3:38 pm
MotoTrojan wrote: Tue Aug 27, 2019 2:39 pm This is addressed in the OP of Part I. MoneyMarathon also did an awesome job of showing how rebalancing against an imperfectly correlated asset reduces the volatility decay. Imagine you rebalanced daily to 33.3% UPRO and the rest in cash, that would perfectly match the S&P500 except for the expense ratio, borrowing costs, and interest earned on the cash. Rebalancing weekly will have more decay but be far better than buy & hold, and so on. This is a trade-off with a desire to get some momentum from letting things ride, and transaction costs, hence why many people have settled on quarterly rebalance. When holding >33% UPRO you also can get larger drawdowns if you rebalance too frequently during a decline.

They don't do well held alone, but when used as part of a portfolio they have a place. They actually work better during long up or down trends but can get hurt in flatter markets with high volatility. For example, since inception UPRO has actually returned closer to 5x the unleveraged S&P500, rather than 3x minus expenses. Futures can give you more direct leverage without the volatility decay, but have their own issues especially for smaller portfolios.
I understand this part about decreasing the loss due to volatility decay using rebalancing, but I have a related question that I didn't see addressed (I did read most of part 2 and some of part 1).

Let's say we've decided to stick with a 50/50 allocation for simplicity. So one might do 50% UPRO and 50% TMF with quarterly rebalancing. As everyone knows, one of the sources of inefficiency is the volatility decay caused by daily rebalancing.

Volatility decay causes losses when the index being tracked is volatile. SPY and TLT are both quite volatile. But the portfolio of 50/50 SPY/TLT is much less volatile. Would this strategy be better implemented by a product that held a 3x leveraged version of the 50/50 SPY/TLT portfolio, reset daily? I know there's no such ETF in the market right now, but if a provider were to introduce such a product, would that be better than quarterly rebalanced UPRO/TMF?
A portfolio of 50/50 3x leveraged would still have to hold the underlying assets that cause the volatility decay. It could alleviate things by rebalancing daily though between the holdings. This is what a fund like PSLDX does, where it maintains 100% exposure to the S&P500 via futures, and then holds an active bond allocation to try and outperform by achieving more income than the borrowing costs of the S&P500 holding.

A fund like that though would get crushed in a downturn I would wager though, as you'd be rebalancing to 150% S&P500 exposure daily. This can be seen in how monthly rebalance does far worse in drawdown than quarterly.
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

MotoTrojan wrote: Tue Aug 27, 2019 3:41 pm
wise_magus wrote: Tue Aug 27, 2019 3:38 pm
MotoTrojan wrote: Tue Aug 27, 2019 2:39 pm This is addressed in the OP of Part I. MoneyMarathon also did an awesome job of showing how rebalancing against an imperfectly correlated asset reduces the volatility decay. Imagine you rebalanced daily to 33.3% UPRO and the rest in cash, that would perfectly match the S&P500 except for the expense ratio, borrowing costs, and interest earned on the cash. Rebalancing weekly will have more decay but be far better than buy & hold, and so on. This is a trade-off with a desire to get some momentum from letting things ride, and transaction costs, hence why many people have settled on quarterly rebalance. When holding >33% UPRO you also can get larger drawdowns if you rebalance too frequently during a decline.

They don't do well held alone, but when used as part of a portfolio they have a place. They actually work better during long up or down trends but can get hurt in flatter markets with high volatility. For example, since inception UPRO has actually returned closer to 5x the unleveraged S&P500, rather than 3x minus expenses. Futures can give you more direct leverage without the volatility decay, but have their own issues especially for smaller portfolios.
I understand this part about decreasing the loss due to volatility decay using rebalancing, but I have a related question that I didn't see addressed (I did read most of part 2 and some of part 1).

Let's say we've decided to stick with a 50/50 allocation for simplicity. So one might do 50% UPRO and 50% TMF with quarterly rebalancing. As everyone knows, one of the sources of inefficiency is the volatility decay caused by daily rebalancing.

Volatility decay causes losses when the index being tracked is volatile. SPY and TLT are both quite volatile. But the portfolio of 50/50 SPY/TLT is much less volatile. Would this strategy be better implemented by a product that held a 3x leveraged version of the 50/50 SPY/TLT portfolio, reset daily? I know there's no such ETF in the market right now, but if a provider were to introduce such a product, would that be better than quarterly rebalanced UPRO/TMF?
A portfolio of 50/50 3x leveraged would still have to hold the underlying assets that cause the volatility decay. It could alleviate things by rebalancing daily though between the holdings. This is what a fund like PSLDX does, where it maintains 100% exposure to the S&P500 via futures, and then holds an active bond allocation to try and outperform by achieving more income than the borrowing costs of the S&P500 holding.

A fund like that though would get crushed in a downturn I would wager though, as you'd be rebalancing to 150% S&P500 exposure daily. This can be seen in how monthly rebalance does far worse in drawdown than quarterly.
The calculations I've done with different rebalance periods show that daily rebalancing mitigates some of the volatility drag, which adds a percentage point or two to the CAGR. This bonus drops off rapidly as the inverse of the number of days between rebalances. I've thought that an ETF would be the best way to implement this daily rebalance.

I've been checking on the difference between monthly and quarterly returns. I think that the quarterly return out-performance that people have discussed with UPROSIM/TMFSIM is largely an artifact of the starting day.

It turns out that starting on different days within the first quarter would have given CAGR between 14.5% and 16.5% for the quarterly updating; the first day happens to be at the high end and the average is more like 15.5%. Doing the same thing with monthly rebalancing gives an average also close to 15.5%.

Just to say that quarterly is probably about equivalent to monthly, rather than significantly better.
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