HEDGEFUNDIE's excellent adventure Part II: The next journey

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Mon Oct 07, 2019 4:23 pm

EfficientInvestor wrote:
Mon Oct 07, 2019 4:11 pm
305pelusa wrote:
Mon Oct 07, 2019 2:35 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 2:22 pm
305pelusa wrote:
Mon Oct 07, 2019 2:07 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 1:57 pm


I would say 1.5% would be a reasonable expected return.
Right. Let's do the same for the 3 month Treasury (the cash rate). Given our assumption about the random walk nature of rates, then the current 1.7% yield would be our expected return for cash for the upcoming decade as well.

Given that our expected return on 2Y treasuries is 1.5% and our expected return of cash is 1.7%, then the expected/average/mean Sharpe ratio is negative.

3) I don't really believe the 2Y treasury Sharpe will likely be negative for the next decade. I don't think you believe so either. So what assumption have we made the we might want to revisit? Hint: Back to Q1
I agree with your conclusions. I have done the same analysis in the past and have wrestled with the logic. My conclusion is that the expected return of cash over a long period of time isn't necessarily the current yield. As you suggest, we need to go back to the first question. While I'm of the opinion that the market is random, I don't think the fed is random in how they set their policy. The 2-year rate is random because it is dictated by the market more than it is the fed. The further you go out on the yield curve, the less you are pinned to the fed rate and the more you are affected by the market. The cash rate is not as random because it is more dictated by the fed than the market. As you stated, I don't think the fed will ever allow the curve to stay inverted for a whole decade. It may last a few years at times, but the inversion tends to correct itself one way or another.
Ok good. This is all in retrospect pretty obvious right? If we are to believe that 2Y treasuries will likely have a positive Sharpe then, given that it's currently on track to a negative Sharpe, we believe it is more likely that the curve "straightens" back up than further inverts. Whether that's from Fed policy or otherwise does not actually matter.


4) If we (and the market) have a very reasonable expectation that the Fed will cut its rate (and everyone thinks so), this would explain a piling into the 2Y treasuries. So from a return perspective for the upcoming 2 years, what is riskier? Buying and holding 2Y bonds or investing in cash and reinvesting every 3 months. Which one is less likely to produce its expected return (1.5% for one and 1.7% for the other).
If I were to place all my money in a single investment, I agree that putting it in cash at the moment makes the most sense. However, I'm not placing all of my money in a single investment. I am trying to implement a 2 coin flip scenario as described in my post at the link below. If I were to put half my risk in stocks and half my risk in cash, I would just have a 50% diluted stock portfolio. It is very possible that my leveraged bond coin will flip negative returns over the next couple years due to the inversion, but that doesn't mean I should go back to flipping just a single coin (i.e. stocks). While the odds may be a little less due to the inversion, there is still a very real possibility that the leveraged bond coin will continue to flip positive over the next couple years. That is why I continue to flip two coins...you never know what will come next.

https://theleveragedindexer.com/2019/08 ... ged-bonds/
Humor me for one more post. Just answer the question #4

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

Post by EfficientInvestor » Mon Oct 07, 2019 4:33 pm

305pelusa wrote:
Mon Oct 07, 2019 4:23 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 4:11 pm
305pelusa wrote:
Mon Oct 07, 2019 2:35 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 2:22 pm
305pelusa wrote:
Mon Oct 07, 2019 2:07 pm


Right. Let's do the same for the 3 month Treasury (the cash rate). Given our assumption about the random walk nature of rates, then the current 1.7% yield would be our expected return for cash for the upcoming decade as well.

Given that our expected return on 2Y treasuries is 1.5% and our expected return of cash is 1.7%, then the expected/average/mean Sharpe ratio is negative.

3) I don't really believe the 2Y treasury Sharpe will likely be negative for the next decade. I don't think you believe so either. So what assumption have we made the we might want to revisit? Hint: Back to Q1
I agree with your conclusions. I have done the same analysis in the past and have wrestled with the logic. My conclusion is that the expected return of cash over a long period of time isn't necessarily the current yield. As you suggest, we need to go back to the first question. While I'm of the opinion that the market is random, I don't think the fed is random in how they set their policy. The 2-year rate is random because it is dictated by the market more than it is the fed. The further you go out on the yield curve, the less you are pinned to the fed rate and the more you are affected by the market. The cash rate is not as random because it is more dictated by the fed than the market. As you stated, I don't think the fed will ever allow the curve to stay inverted for a whole decade. It may last a few years at times, but the inversion tends to correct itself one way or another.
Ok good. This is all in retrospect pretty obvious right? If we are to believe that 2Y treasuries will likely have a positive Sharpe then, given that it's currently on track to a negative Sharpe, we believe it is more likely that the curve "straightens" back up than further inverts. Whether that's from Fed policy or otherwise does not actually matter.


4) If we (and the market) have a very reasonable expectation that the Fed will cut its rate (and everyone thinks so), this would explain a piling into the 2Y treasuries. So from a return perspective for the upcoming 2 years, what is riskier? Buying and holding 2Y bonds or investing in cash and reinvesting every 3 months. Which one is less likely to produce its expected return (1.5% for one and 1.7% for the other).
If I were to place all my money in a single investment, I agree that putting it in cash at the moment makes the most sense. However, I'm not placing all of my money in a single investment. I am trying to implement a 2 coin flip scenario as described in my post at the link below. If I were to put half my risk in stocks and half my risk in cash, I would just have a 50% diluted stock portfolio. It is very possible that my leveraged bond coin will flip negative returns over the next couple years due to the inversion, but that doesn't mean I should go back to flipping just a single coin (i.e. stocks). While the odds may be a little less due to the inversion, there is still a very real possibility that the leveraged bond coin will continue to flip positive over the next couple years. That is why I continue to flip two coins...you never know what will come next.

https://theleveragedindexer.com/2019/08 ... ged-bonds/
Humor me for one more post. Just answer the question #4
At the moment, I would say that the 2-year has a better chance of hitting its expected return because history has shown that the fed will typically cut fed fund rates to allow the curve to uninvert. So even if the 2-year stays as-is for 2 years, cash will come down and not return the 1.7%. For instance, the Fedwatch tool on the CME site (link below) shows that the market is currently pricing in a 74% chance that the fed fund rate will be less than 1.5% 6 months from now.

https://www.cmegroup.com/trading/inter ... -fomc.html

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Mon Oct 07, 2019 6:34 pm

EfficientInvestor wrote:
Mon Oct 07, 2019 4:33 pm
At the moment, I would say that the 2-year has a better chance of hitting its expected return because history has shown that the fed will typically cut fed fund rates to allow the curve to uninvert. So even if the 2-year stays as-is for 2 years, cash will come down and not return the 1.7%. For instance, the Fedwatch tool on the CME site (link below) shows that the market is currently pricing in a 74% chance that the fed fund rate will be less than 1.5% 6 months from now.

https://www.cmegroup.com/trading/inter ... -fomc.html
I agree. Although remember we can come to this conclusion independently of the cause. We don't need to look at history at all.

So 2Y treasuries have a higher chance of producing their expected return than cash. That means that the reinvestment risk of cash is a bigger risk than the term risk of 2Y treasuries. That's what a curve inversion means. People who hold cash are the ones subject to risk and uncertainty on their returns; and the market chooses the rates to reward you for that risk.

With that in mind:
EfficientInvestor wrote:
Mon Oct 07, 2019 4:11 pm
If I were to place all my money in a single investment, I agree that putting it in cash at the moment makes the most sense.
I have no clue why you think cash makes more sense. Cash right now is riskier and, hence, has a premium return. You should only use cash if your ability, need and willingness to take risk says so. Otherwise, you should stay with the less risky 2Y treasuries. Once again, this is because there's a large Fed rate cut expectation, as other posters have mentioned.
EfficientInvestor wrote:
Mon Oct 07, 2019 4:11 pm
If I were to put half my risk in stocks and half my risk in cash, I would just have a 50% diluted stock portfolio.
That would make sense if the curve was upward-yielding (i.e. cash was truly the riskless asset). But the curve is inverted. So cash is not actually that riskless. In fact, as you said already, its return is rather uncertain. So with an inverted curve and a desire to take a risk different than stocks, I argue you should hold cash.

In fact, given the 74% chance of a rate cut to under 1.5%, holding cash takes serious courage. And you should (at least in theory) be rewarded for that.

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

Post by drock » Mon Oct 07, 2019 8:10 pm

Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

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

Post by rascott » Mon Oct 07, 2019 8:38 pm

drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.
A quite reasonable approach.

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

Post by MotoTrojan » Mon Oct 07, 2019 11:59 pm

I’m fascinated by the number of adoptees of this along with threads popping up to discuss various side angles and questions.

Playing devils advocate (since I do hold a variant myself), why does someone posting about large cap growth, FAANG, momentum, or even a single stock like Amazon not garner the same sort of awe? There are examples that have similar 3-4 decade periods of outperformance. I feel that hedgefundie has been a bit disingenuous about the impact of rates plunging from double digits to where they are today, and pretending its really the equity side that is driving returns. Would people still be joining en-mass to get a 1-3% CAGR boost over S&P500 while still being opened up to 60-70% drawdowns (more realistic expected longterm return IMHO)?

Before HF chimes in with a recent period of rates staying flat and CAGR being well over 20%, please find me an example that goes through an equity bull/bear cycle.

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

Post by rascott » Tue Oct 08, 2019 12:51 am

drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Tue Oct 08, 2019 11:15 am

rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

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

Post by robertmcd » Tue Oct 08, 2019 11:21 am

rascott wrote:
Tue Oct 08, 2019 12:51 am
drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Problem with this strategy is that you would have done worse thru the past 2 recessions doing this. The 2 yr yield has dropped more than the 30 yr in the past recessions. The time to be on the short end of the curve is when the curve is inverted, not positively sloping.

This could change when we go to a permanent 0% FFR. But for now there is so much upside being on the short end of the curve when it comes to countering equity risk.

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

Post by rascott » Tue Oct 08, 2019 11:34 am

305pelusa wrote:
Tue Oct 08, 2019 11:15 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.

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

Post by rascott » Tue Oct 08, 2019 11:37 am

robertmcd wrote:
Tue Oct 08, 2019 11:21 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Problem with this strategy is that you would have done worse thru the past 2 recessions doing this. The 2 yr yield has dropped more than the 30 yr in the past recessions. The time to be on the short end of the curve is when the curve is inverted, not positively sloping.

This could change when we go to a permanent 0% FFR. But for now there is so much upside being on the short end of the curve when it comes to countering equity risk.
Yes I've read that as well, and was why I took the position I did.... but then we have this great debate that it's a bad idea due to starting out in a negative carry position.

Maybe all I should care about is getting my target portfolio duration .... and then just find what looks like the best place in the futures market to get it? Which right now appears to be the Ultra Bond (25+ year).

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

Post by Lee_WSP » Tue Oct 08, 2019 11:42 am

MotoTrojan wrote:
Mon Oct 07, 2019 11:59 pm
I’m fascinated by the number of adoptees of this along with threads popping up to discuss various side angles and questions.

Playing devils advocate (since I do hold a variant myself), why does someone posting about large cap growth, FAANG, momentum, or even a single stock like Amazon not garner the same sort of awe? There are examples that have similar 3-4 decade periods of outperformance. I feel that hedgefundie has been a bit disingenuous about the impact of rates plunging from double digits to where they are today, and pretending its really the equity side that is driving returns. Would people still be joining en-mass to get a 1-3% CAGR boost over S&P500 while still being opened up to 60-70% drawdowns (more realistic expected longterm return IMHO)?

Before HF chimes in with a recent period of rates staying flat and CAGR being well over 20%, please find me an example that goes through an equity bull/bear cycle.
It can even underperform during times of rate increases. Which may or may not happen again. But who knows!

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

Post by robertmcd » Tue Oct 08, 2019 11:50 am

rascott wrote:
Tue Oct 08, 2019 11:37 am
robertmcd wrote:
Tue Oct 08, 2019 11:21 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Problem with this strategy is that you would have done worse thru the past 2 recessions doing this. The 2 yr yield has dropped more than the 30 yr in the past recessions. The time to be on the short end of the curve is when the curve is inverted, not positively sloping.

This could change when we go to a permanent 0% FFR. But for now there is so much upside being on the short end of the curve when it comes to countering equity risk.
Yes I've read that as well, and was why I took the position I did.... but then we have this great debate that it's a bad idea due to starting out in a negative carry position.

Maybe all I should care about is getting my target portfolio duration .... and then just find what looks like the best place in the futures market to get it? Which right now appears to be the Ultra Bond (25+ year).
You could also diversify across the curve and hold all 6 futures contracts (leveraged to match volatility on each).

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

Post by rascott » Tue Oct 08, 2019 12:07 pm

robertmcd wrote:
Tue Oct 08, 2019 11:50 am
rascott wrote:
Tue Oct 08, 2019 11:37 am
robertmcd wrote:
Tue Oct 08, 2019 11:21 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Problem with this strategy is that you would have done worse thru the past 2 recessions doing this. The 2 yr yield has dropped more than the 30 yr in the past recessions. The time to be on the short end of the curve is when the curve is inverted, not positively sloping.

This could change when we go to a permanent 0% FFR. But for now there is so much upside being on the short end of the curve when it comes to countering equity risk.
Yes I've read that as well, and was why I took the position I did.... but then we have this great debate that it's a bad idea due to starting out in a negative carry position.

Maybe all I should care about is getting my target portfolio duration .... and then just find what looks like the best place in the futures market to get it? Which right now appears to be the Ultra Bond (25+ year).
You could also diversify across the curve and hold all 6 futures contracts (leveraged to match volatility on each).
I'd think you'd need a pretty large portfolio to take down all of them without tilting it too heavy. Doesn't really seem feasible.

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

Post by PluckyDucky » Tue Oct 08, 2019 12:29 pm

MotoTrojan wrote:
Mon Oct 07, 2019 11:59 pm
I’m fascinated by the number of adoptees of this along with threads popping up to discuss various side angles and questions.

Playing devils advocate (since I do hold a variant myself), why does someone posting about large cap growth, FAANG, momentum, or even a single stock like Amazon not garner the same sort of awe? There are examples that have similar 3-4 decade periods of outperformance. I feel that hedgefundie has been a bit disingenuous about the impact of rates plunging from double digits to where they are today, and pretending its really the equity side that is driving returns. Would people still be joining en-mass to get a 1-3% CAGR boost over S&P500 while still being opened up to 60-70% drawdowns (more realistic expected longterm return IMHO)?

Before HF chimes in with a recent period of rates staying flat and CAGR being well over 20%, please find me an example that goes through an equity bull/bear cycle.
Because it is easier. It doesn't require the luck of picking a particular stock or sector. That's why the 3-fund portfolio is popular. Unfortunately, there seems to be an issue with rising rates for TMF, which people are dealing with in various ways.

Image

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

Post by PluckyDucky » Tue Oct 08, 2019 12:30 pm

Someone needs to aggregate all the posts in the various threads into a book.

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

Post by dspencer » Tue Oct 08, 2019 12:48 pm

MotoTrojan wrote:
Mon Oct 07, 2019 11:59 pm
I’m fascinated by the number of adoptees of this along with threads popping up to discuss various side angles and questions.

Playing devils advocate (since I do hold a variant myself), why does someone posting about large cap growth, FAANG, momentum, or even a single stock like Amazon not garner the same sort of awe? There are examples that have similar 3-4 decade periods of outperformance. I feel that hedgefundie has been a bit disingenuous about the impact of rates plunging from double digits to where they are today, and pretending its really the equity side that is driving returns. Would people still be joining en-mass to get a 1-3% CAGR boost over S&P500 while still being opened up to 60-70% drawdowns (more realistic expected longterm return IMHO)?

Before HF chimes in with a recent period of rates staying flat and CAGR being well over 20%, please find me an example that goes through an equity bull/bear cycle.
I am not one of the people who pretend this is a "Boglehead" strategy. That being said, it does have several commonalities. It doesn't require picking a single stock or sector that you believe will outperform for decades or paying someone else to do the same. Putting all your money in one stock is pretty much that anti-Bogle philosophy. This is more like an extreme high risk/reward version of being a passive investor, albeit with some macroeconomic assumptions that may prove to be dangerous. Personally, I think people doing this with a large percent of their assets are being irresponsible. Same with someone who puts 100% of their money into Netflix. But it's their money, so to each their own.

I don't think it's fair to say that HF is being disingenuous. That implies he knows the reality and is trying to mislead people. Isn't changing the strategy evidence of trying to approach the question honestly and openly?

I'd feel much better if LTT were yielding 5%. If the rates drop to near zero, I will probably bail on this strategy.

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Tue Oct 08, 2019 1:15 pm

rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!

RandomWord
Posts: 82
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord » Tue Oct 08, 2019 1:16 pm

305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.

User avatar
305pelusa
Posts: 880
Joined: Fri Nov 16, 2018 10:20 pm

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

Post by 305pelusa » Tue Oct 08, 2019 1:27 pm

RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.
Why would the implied repo rate change with bond prices?

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Tue Oct 08, 2019 1:31 pm

RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.

I mean that tool is currently showing a negative implied repo rate for the Ultra bond! What? It was at roughly 1.6% this morning.

So they are paying me to borrow to buy that contract?

caklim00
Posts: 1915
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Tue Oct 08, 2019 1:37 pm

robertmcd wrote:
Tue Oct 08, 2019 11:50 am
rascott wrote:
Tue Oct 08, 2019 11:37 am
robertmcd wrote:
Tue Oct 08, 2019 11:21 am
rascott wrote:
Tue Oct 08, 2019 12:51 am
drock wrote:
Mon Oct 07, 2019 8:10 pm
Treasury futures are rolled quarterly. Why not do something like the following at each roll date:

If yield curve is inverted such that the roll rate on 2y futures is negative then use the appropriate number of longer term futures (whose roll rates are not negative) for the duration desired.

If yield curve is not inverted buy the 2y futures in the appropriate amount for the desired duration because historically their sharpe has been higher.

I came back across this:

1. Pick the Treasury maturity that has the highest risk premium per unit of duration. This is actually pretty easy. If you look at the yield curve graph, it's usually the steepest upward sloping part of the curve that is higher than the cash rate. This is often the 2- or 5-year Treasury note, but right now it's the 30-year due to the inverted yield curve.

2. Use leverage, so the dollar value of a 1-basis-point move in interest rates is equal across bonds and the position is set to your desired volatility target.


Also.... this guy says that the implied repo rate in Treasury futures markets is SOFR.... not 3 month LIBOR (which it is for equity futures).

https://seekingalpha.com/article/425070 ... ield-curve
Problem with this strategy is that you would have done worse thru the past 2 recessions doing this. The 2 yr yield has dropped more than the 30 yr in the past recessions. The time to be on the short end of the curve is when the curve is inverted, not positively sloping.

This could change when we go to a permanent 0% FFR. But for now there is so much upside being on the short end of the curve when it comes to countering equity risk.
Yes I've read that as well, and was why I took the position I did.... but then we have this great debate that it's a bad idea due to starting out in a negative carry position.

Maybe all I should care about is getting my target portfolio duration .... and then just find what looks like the best place in the futures market to get it? Which right now appears to be the Ultra Bond (25+ year).
You could also diversify across the curve and hold all 6 futures contracts (leveraged to match volatility on each).
Interesting idea... Possibly 1 contract on each which would be ~700k in contracts (since 2 year is ~200k). Is it easy to purchase each one? Or are the Ultra ones more difficult?

MotoTrojan
Posts: 6497
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan » Tue Oct 08, 2019 1:51 pm

dspencer wrote:
Tue Oct 08, 2019 12:48 pm
MotoTrojan wrote:
Mon Oct 07, 2019 11:59 pm
I’m fascinated by the number of adoptees of this along with threads popping up to discuss various side angles and questions.

Playing devils advocate (since I do hold a variant myself), why does someone posting about large cap growth, FAANG, momentum, or even a single stock like Amazon not garner the same sort of awe? There are examples that have similar 3-4 decade periods of outperformance. I feel that hedgefundie has been a bit disingenuous about the impact of rates plunging from double digits to where they are today, and pretending its really the equity side that is driving returns. Would people still be joining en-mass to get a 1-3% CAGR boost over S&P500 while still being opened up to 60-70% drawdowns (more realistic expected longterm return IMHO)?

Before HF chimes in with a recent period of rates staying flat and CAGR being well over 20%, please find me an example that goes through an equity bull/bear cycle.
I am not one of the people who pretend this is a "Boglehead" strategy. That being said, it does have several commonalities. It doesn't require picking a single stock or sector that you believe will outperform for decades or paying someone else to do the same. Putting all your money in one stock is pretty much that anti-Bogle philosophy. This is more like an extreme high risk/reward version of being a passive investor, albeit with some macroeconomic assumptions that may prove to be dangerous. Personally, I think people doing this with a large percent of their assets are being irresponsible. Same with someone who puts 100% of their money into Netflix. But it's their money, so to each their own.

I don't think it's fair to say that HF is being disingenuous. That implies he knows the reality and is trying to mislead people. Isn't changing the strategy evidence of trying to approach the question honestly and openly?

I'd feel much better if LTT were yielding 5%. If the rates drop to near zero, I will probably bail on this strategy.
I guess disingenuous with himself then. Using examples during a bull to show that performance is high even when rates are unchanged, and using that to extrapolate to performance over decades also being in the 20% realm even though the 1982+ backtest had incredible bond-driven performance to hit that just feels wrong. Backtest did rates going up and back down (1955-present) are much more representative and show a 13% CAGR vs. 10% benchmark, even with the new 55/45 allocation.

I sure hope he’s right, but I strongly disagree with the rationalization I suppose.

RandomWord
Posts: 82
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord » Tue Oct 08, 2019 4:35 pm

rascott wrote:
Tue Oct 08, 2019 1:31 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am


Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.

I mean that tool is currently showing a negative implied repo rate for the Ultra bond! What? It was at roughly 1.6% this morning.

So they are paying me to borrow to buy that contract?
Hmm, that does seem like a pretty wild swing. Maybe that tool doesn't always pick up the right cheapest-to-deliver bond? But I'm just speculating. Looking at it now, i don't see any where the CTD is negative. It would be nice if someone with access to a bloomberg terminal could weigh in here, since that might have better data.

RandomWord
Posts: 82
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord » Tue Oct 08, 2019 4:37 pm

305pelusa wrote:
Tue Oct 08, 2019 1:27 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am
305pelusa wrote:
Tue Oct 08, 2019 11:15 am


Umh perhaps. I wouldn't have guessed so. Look my point is that instead of saying "it must be X because otherwise there's arbitrage", I would just calculate it (or use a tool; I can only imagine CME has one already). I've only really looked at S&P futures and pretty consistently I see them show close to LIBOR rates. I just assumed this is the case for Treasury contracts too; but I would never buy/sell them unless I confirmed it.

Interest rate products are fairly complicated and I haven't read much on the dynamics. It frankly wouldn't surprise me if you found some implied rates to be higher or lower.

In general, that's why I'm extremely wary of these derivative products. You could end up borrowing at a far higher rate than you thought or theory might've seemed to dictate.

Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.
Why would the implied repo rate change with bond prices?
Because it's calculated using the price as one of the inputs? But there are also other factors that can affect it, all changing constantly.

User avatar
305pelusa
Posts: 880
Joined: Fri Nov 16, 2018 10:20 pm

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

Post by 305pelusa » Tue Oct 08, 2019 5:12 pm

RandomWord wrote:
Tue Oct 08, 2019 4:37 pm
305pelusa wrote:
Tue Oct 08, 2019 1:27 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am



Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.
Why would the implied repo rate change with bond prices?
Because it's calculated using the price as one of the inputs? But there are also other factors that can affect it, all changing constantly.
I think I'm confused. I thought the implied repo rate is the borrowing rate for market participants. It is calculated by taking into account both bond prices and the contract price. But since both of those change with underlying price changes, I thought it just canceled out.

I'll have to read about this at some point. Feeling pretty ignorant right now

Lee_WSP
Posts: 1151
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Location: Arizona

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

Post by Lee_WSP » Tue Oct 08, 2019 5:30 pm

I think the key word is "implied". You aren't actually borrowing money to buy these futures, you're purchasing the right & obligation to purchase them in the future, so you aren't even buying them today.

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Tue Oct 08, 2019 7:14 pm

RandomWord wrote:
Tue Oct 08, 2019 4:35 pm
rascott wrote:
Tue Oct 08, 2019 1:31 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am



Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.

I mean that tool is currently showing a negative implied repo rate for the Ultra bond! What? It was at roughly 1.6% this morning.

So they are paying me to borrow to buy that contract?
Hmm, that does seem like a pretty wild swing. Maybe that tool doesn't always pick up the right cheapest-to-deliver bond? But I'm just speculating. Looking at it now, i don't see any where the CTD is negative. It would be nice if someone with access to a bloomberg terminal could weigh in here, since that might have better data.

It's not now... but it dropped to -0.16% at one point today... when I posted... and it was picking up the CTD.... as every other bond was more negative.

And the price of the future was exactly live with what I was getting quoted at TDA.

But also look at how widely different the rates are for the different bonds/ notes. The whole thing is bizarre.... are day traders knocking the futures prices that far out of whack? It seems improbable, but I'd encourage you to watch that thing through a trading day.

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Tue Oct 08, 2019 7:23 pm

305pelusa wrote:
Tue Oct 08, 2019 5:12 pm
RandomWord wrote:
Tue Oct 08, 2019 4:37 pm
305pelusa wrote:
Tue Oct 08, 2019 1:27 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm


Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.
Why would the implied repo rate change with bond prices?
Because it's calculated using the price as one of the inputs? But there are also other factors that can affect it, all changing constantly.
I think I'm confused. I thought the implied repo rate is the borrowing rate for market participants. It is calculated by taking into account both bond prices and the contract price. But since both of those change with underlying price changes, I thought it just canceled out.

I'll have to read about this at some point. Feeling pretty ignorant right now
What I've learned over the past few months is that bond futures are very simple in theory (and even buying/ selling)
and very difficult to understand as far as the underlying math. It often feels like you just have to take the assumption for granted that the things are efficient. They are some of the deepest/ liquid markets on earth, so you'd think they would be.... but it is certainly not setup for the avg Joe to grasp at all
.. and even the publications that places like CME put out are fairly advanced.

That said, I bought one ultra bond future today for the hell of it.... when I saw that negative implied rate pop up.... and sold off several 2 years. No idea what it will do..... but holy hell are they volatile on their own. I think I was up $500 by the time the executed trade showed up in my account (like 10 secs)
Basically one contract is all I could hold of those.... and needed to up tbill position to keep things close to 3x leverage.

The ultra bond is basically equivalent to TLT (same duration and avg maturity) ..... but levered like 25-1... (roughly 4800 margin for $120k bond).... per the CME tool when I bought it I got it for basically 0% implied repo rate. I have no clue if that is true or not.

caklim00
Posts: 1915
Joined: Mon May 26, 2008 10:09 am

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

Post by caklim00 » Tue Oct 08, 2019 8:01 pm

rascott wrote:
Tue Oct 08, 2019 7:23 pm
305pelusa wrote:
Tue Oct 08, 2019 5:12 pm
RandomWord wrote:
Tue Oct 08, 2019 4:37 pm
305pelusa wrote:
Tue Oct 08, 2019 1:27 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm


Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.
Why would the implied repo rate change with bond prices?
Because it's calculated using the price as one of the inputs? But there are also other factors that can affect it, all changing constantly.
I think I'm confused. I thought the implied repo rate is the borrowing rate for market participants. It is calculated by taking into account both bond prices and the contract price. But since both of those change with underlying price changes, I thought it just canceled out.

I'll have to read about this at some point. Feeling pretty ignorant right now
What I've learned over the past few months is that bond futures are very simple in theory (and even buying/ selling)
and very difficult to understand as far as the underlying math. It often feels like you just have to take the assumption for granted that the things are efficient. They are some of the deepest/ liquid markets on earth, so you'd think they would be.... but it is certainly not setup for the avg Joe to grasp at all
.. and even the publications that places like CME put out are fairly advanced.

That said, I bought one ultra bond future today for the hell of it.... when I saw that negative implied rate pop up.... and sold off several 2 years. No idea what it will do..... but holy hell are they volatile on their own. I think I was up $500 by the time the executed trade showed up in my account (like 10 secs)
Basically one contract is all I could hold of those.... and needed to up tbill position to keep things close to 3x leverage.

The ultra bond is basically equivalent to TLT (same duration and avg maturity) ..... but levered like 25-1... (roughly 4800 margin for $120k bond).... per the CME tool when I bought it I got it for basically 0% implied repo rate. I have no clue if that is true or not.
Is this the page where you look up the margin requirements: https://www.cmegroup.com/trading/intere ... geNumber=1
I see 10 year says $1300, regular 30 year says $3000, 2 year is $640.

What do you mean by up tbill position to keep things close to 3x leverage?

NTSX doesn't hold the Ultra Long Bond for some reason.

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Tue Oct 08, 2019 9:04 pm

caklim00 wrote:
Tue Oct 08, 2019 8:01 pm
rascott wrote:
Tue Oct 08, 2019 7:23 pm
305pelusa wrote:
Tue Oct 08, 2019 5:12 pm
RandomWord wrote:
Tue Oct 08, 2019 4:37 pm
305pelusa wrote:
Tue Oct 08, 2019 1:27 pm


Why would the implied repo rate change with bond prices?
Because it's calculated using the price as one of the inputs? But there are also other factors that can affect it, all changing constantly.
I think I'm confused. I thought the implied repo rate is the borrowing rate for market participants. It is calculated by taking into account both bond prices and the contract price. But since both of those change with underlying price changes, I thought it just canceled out.

I'll have to read about this at some point. Feeling pretty ignorant right now
What I've learned over the past few months is that bond futures are very simple in theory (and even buying/ selling)
and very difficult to understand as far as the underlying math. It often feels like you just have to take the assumption for granted that the things are efficient. They are some of the deepest/ liquid markets on earth, so you'd think they would be.... but it is certainly not setup for the avg Joe to grasp at all
.. and even the publications that places like CME put out are fairly advanced.

That said, I bought one ultra bond future today for the hell of it.... when I saw that negative implied rate pop up.... and sold off several 2 years. No idea what it will do..... but holy hell are they volatile on their own. I think I was up $500 by the time the executed trade showed up in my account (like 10 secs)
Basically one contract is all I could hold of those.... and needed to up tbill position to keep things close to 3x leverage.

The ultra bond is basically equivalent to TLT (same duration and avg maturity) ..... but levered like 25-1... (roughly 4800 margin for $120k bond).... per the CME tool when I bought it I got it for basically 0% implied repo rate. I have no clue if that is true or not.
Is this the page where you look up the margin requirements: https://www.cmegroup.com/trading/intere ... geNumber=1
I see 10 year says $1300, regular 30 year says $3000, 2 year is $640.

What do you mean by up tbill position to keep things close to 3x leverage?

NTSX doesn't hold the Ultra Long Bond for some reason.
Yep.... that's the page where you can see all that. Looks about right.

The implied repo rate was what was fascinating for me. I'm going to assume that CME knows what they are doing and putting out accurate data..... but it was amazing how much it moved intra- day..... shorter bonds seemed to stay pretty steady... but longer term bonds moved all over with the repo rate.... from 1.6% all the way to negative 0.16%.

I'm guessing just not enough people to take the other side of the trade for a large window.... until someone else came in. I always assumed more liquidity than that.... or maybe a lot of traders just are ignoring in entirely.... until enough that do move back in and get it closer to "normal"

EfficientInvestor
Posts: 234
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

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

Post by EfficientInvestor » Tue Oct 08, 2019 9:36 pm

305pelusa wrote:
Sun Oct 06, 2019 11:15 pm
Again, LT bonds still yield positive returns above RFR. TMF's fees are high enough that they nullify much of that but it's not as bad as -0.6%.

As to the curve inversion: So then why wouldn't you just wait until it "straightens" back up and THEN establish your position with a positive expected return? This is the part I'm missing.
I've been thinking a lot the last few days about investing in leveraged 2-year treasuries when the yield curve is inverted. I decided to put together the graph below that shows 12-month excess return given the initial spread between the 2-year yield and fed fund rate. This includes the 12-month rolling return for every month since 1955. As the graph shows, there isn't much correlation between the spread and the excess return. The correlation was about 0.1. The main thing I'm trying to point out with this is that a negative spread doesn't really mean anything. Of all the occurrences that occurred with a negative spread, there were more positive excess returns (99) over the next 12-months than negative excess returns (68). If someone wants to do an independent, similar analysis in order to verify my results, that would be cool.

Image

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott » Tue Oct 08, 2019 9:46 pm

EfficientInvestor wrote:
Tue Oct 08, 2019 9:36 pm
305pelusa wrote:
Sun Oct 06, 2019 11:15 pm
Again, LT bonds still yield positive returns above RFR. TMF's fees are high enough that they nullify much of that but it's not as bad as -0.6%.

As to the curve inversion: So then why wouldn't you just wait until it "straightens" back up and THEN establish your position with a positive expected return? This is the part I'm missing.
I've been thinking a lot the last few days about investing in leveraged 2-year treasuries when the yield curve is inverted. I decided to put together the graph below that shows 12-month excess return given the initial spread between the 2-year yield and fed fund rate. This includes the 12-month rolling return for every month since 1955. As the graph shows, there isn't much correlation between the spread and the excess return. The correlation was about 0.1. The main thing I'm trying to point out with this is that a negative spread doesn't really mean anything. Of all the occurrences that occurred with a negative spread, there were more positive excess returns (99) over the next 12-months than negative excess returns (68). If someone wants to do an independent, similar analysis in order to verify my results, that would be cool.

Image

Nicely done... maybe this group will solve the complexities of the Treasury futures market yet

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305pelusa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 305pelusa » Tue Oct 08, 2019 11:26 pm

EfficientInvestor wrote:
Tue Oct 08, 2019 9:36 pm
305pelusa wrote:
Sun Oct 06, 2019 11:15 pm
Again, LT bonds still yield positive returns above RFR. TMF's fees are high enough that they nullify much of that but it's not as bad as -0.6%.

As to the curve inversion: So then why wouldn't you just wait until it "straightens" back up and THEN establish your position with a positive expected return? This is the part I'm missing.
I've been thinking a lot the last few days about investing in leveraged 2-year treasuries when the yield curve is inverted. I decided to put together the graph below that shows 12-month excess return given the initial spread between the 2-year yield and fed fund rate. This includes the 12-month rolling return for every month since 1955. As the graph shows, there isn't much correlation between the spread and the excess return. The correlation was about 0.1. The main thing I'm trying to point out with this is that a negative spread doesn't really mean anything. Of all the occurrences that occurred with a negative spread, there were more positive excess returns (99) over the next 12-months than negative excess returns (68). If someone wants to do an independent, similar analysis in order to verify my results, that would be cool.

Image
There's a lot of things to be skeptical here:
1) It's not really clear that the borrowing rates of these interest rate futures are the Fed Fund rate. It currently is for the 2Y contract but it's not for other contracts. Frankly, I don't understand it much. So even if the spread 2Y-FFR is negative does not mean you'd have a negative spread with the implied repo rate of the contract (and vice versa).

My concern is gaining exposure to an asset with a lower yield than the IRR of the contract you use for that exposure. I'm not sure that IRR is represented by your graph.

2) Let's assume for a second that the FFR = IRR. I would expect a very strong correlation between the 2Y spread to the FFR/IRR and the return from being long that contract.
However, you've graphed the relationship against the excess return of 2Y vs cash right? If the cash rate = FFR/IRR, then it would be fine. But, once again, the cash rate (3month bill) is lower than the FFR/IRR, at least today. Significantly lower in fact.

3) Let's assume for a second that the FFR = IRR = cash rate. I would still not be convinced by the graph because you're plotting the returns for the next 12 months. What we want to know, however, is the excess return of 2Y over cash/FFR/IRR over the following X months, where X is the number of months until the curve switches.

4) As a small modification, I would change your graph to be the following 24 months of returns and see what you get (hopefully easy to do). I expect a strong correlation between FFR and cash rate. I also expect a strong correlation between the 2Y spread to cash, and the following 2Y returns (effectively holding until maturity). If you don't see that, I'd be skeptical of the data.

5) On that note, let me know where you got the data from and maybe I'll take a look at some point.

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

Post by drock » Tue Oct 08, 2019 11:30 pm

This article mentions that a lot of times when the yield curve is inverted it is generally followed by the Fed lowering rates and thus not necessarily a bad time to be in leveraged 2 year futures.

https://www.advisorperspectives.com/art ... sury-bonds

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

Post by rascott » Tue Oct 08, 2019 11:44 pm

The reality is we don't have a clear answer to any of this.... and need more people to opine on the subject, IMO.

It may need its own thread/ discussion away from this thread. The Treasury future market is not a simple one to understand, but I believe it has a lot if potential value.

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

Post by rascott » Tue Oct 08, 2019 11:54 pm

drock wrote:
Tue Oct 08, 2019 11:30 pm
This article mentions that a lot of times when the yield curve is inverted it is generally followed by the Fed lowering rates and thus not necessarily a bad time to be in leveraged 2 year futures.

https://www.advisorperspectives.com/art ... sury-bonds
I've read that article like 20x. He's one of the few people I've seen write on this subject. I've seen a few articles on SA... but not many.

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

Post by EfficientInvestor » Wed Oct 09, 2019 6:13 am

305pelusa wrote:
Tue Oct 08, 2019 11:26 pm
EfficientInvestor wrote:
Tue Oct 08, 2019 9:36 pm
305pelusa wrote:
Sun Oct 06, 2019 11:15 pm
Again, LT bonds still yield positive returns above RFR. TMF's fees are high enough that they nullify much of that but it's not as bad as -0.6%.

As to the curve inversion: So then why wouldn't you just wait until it "straightens" back up and THEN establish your position with a positive expected return? This is the part I'm missing.
I've been thinking a lot the last few days about investing in leveraged 2-year treasuries when the yield curve is inverted. I decided to put together the graph below that shows 12-month excess return given the initial spread between the 2-year yield and fed fund rate. This includes the 12-month rolling return for every month since 1955. As the graph shows, there isn't much correlation between the spread and the excess return. The correlation was about 0.1. The main thing I'm trying to point out with this is that a negative spread doesn't really mean anything. Of all the occurrences that occurred with a negative spread, there were more positive excess returns (99) over the next 12-months than negative excess returns (68). If someone wants to do an independent, similar analysis in order to verify my results, that would be cool.

Image
There's a lot of things to be skeptical here:
1) It's not really clear that the borrowing rates of these interest rate futures are the Fed Fund rate. It currently is for the 2Y contract but it's not for other contracts. Frankly, I don't understand it much. So even if the spread 2Y-FFR is negative does not mean you'd have a negative spread with the implied repo rate of the contract (and vice versa).

My concern is gaining exposure to an asset with a lower yield than the IRR of the contract you use for that exposure. I'm not sure that IRR is represented by your graph.

2) Let's assume for a second that the FFR = IRR. I would expect a very strong correlation between the 2Y spread to the FFR/IRR and the return from being long that contract.
However, you've graphed the relationship against the excess return of 2Y vs cash right? If the cash rate = FFR/IRR, then it would be fine. But, once again, the cash rate (3month bill) is lower than the FFR/IRR, at least today. Significantly lower in fact.

3) Let's assume for a second that the FFR = IRR = cash rate. I would still not be convinced by the graph because you're plotting the returns for the next 12 months. What we want to know, however, is the excess return of 2Y over cash/FFR/IRR over the following X months, where X is the number of months until the curve switches.

4) As a small modification, I would change your graph to be the following 24 months of returns and see what you get (hopefully easy to do). I expect a strong correlation between FFR and cash rate. I also expect a strong correlation between the 2Y spread to cash, and the following 2Y returns (effectively holding until maturity). If you don't see that, I'd be skeptical of the data.

5) On that note, let me know where you got the data from and maybe I'll take a look at some point.
The data for the treasury returns came from siamond and is similar to data used to develop the Simba spreadsheet. I sent you a PM with a link to that data set. The yield data came from the FED - https://www.federalreserve.gov/datadown ... px?rel=H15. Prior to 1977, only the 1-year and 3-year are available, so I took the average of the two and called it close enough. I would rather make this assumption than throw out a bulk of the data from the time when we had a rising interest rate environment. The cash value in my excess return calculation came from CASHX in PortfolioVisualizer. The Fed Fund rate came from the St Louis Fed site - https://fred.stlouisfed.org/series/FEDFUNDS.

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

Post by robertmcd » Wed Oct 09, 2019 10:44 am

rascott wrote:
Tue Oct 08, 2019 11:54 pm
drock wrote:
Tue Oct 08, 2019 11:30 pm
This article mentions that a lot of times when the yield curve is inverted it is generally followed by the Fed lowering rates and thus not necessarily a bad time to be in leveraged 2 year futures.

https://www.advisorperspectives.com/art ... sury-bonds
I've read that article like 20x. He's one of the few people I've seen write on this subject. I've seen a few articles on SA... but not many.
Yeah I have actually reached out to Kessler companies about having them run my treasury position. They have a very good track record of being at the right place on the curve for long only treasury exposure.

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

Post by Diego_Quant » Wed Oct 09, 2019 11:17 am

EfficientInvestor wrote:
Mon Oct 07, 2019 4:11 pm
305pelusa wrote:
Mon Oct 07, 2019 2:35 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 2:22 pm
305pelusa wrote:
Mon Oct 07, 2019 2:07 pm
EfficientInvestor wrote:
Mon Oct 07, 2019 1:57 pm


I would say 1.5% would be a reasonable expected return.
Right. Let's do the same for the 3 month Treasury (the cash rate). Given our assumption about the random walk nature of rates, then the current 1.7% yield would be our expected return for cash for the upcoming decade as well.

Given that our expected return on 2Y treasuries is 1.5% and our expected return of cash is 1.7%, then the expected/average/mean Sharpe ratio is negative.

3) I don't really believe the 2Y treasury Sharpe will likely be negative for the next decade. I don't think you believe so either. So what assumption have we made the we might want to revisit? Hint: Back to Q1
I agree with your conclusions. I have done the same analysis in the past and have wrestled with the logic. My conclusion is that the expected return of cash over a long period of time isn't necessarily the current yield. As you suggest, we need to go back to the first question. While I'm of the opinion that the market is random, I don't think the fed is random in how they set their policy. The 2-year rate is random because it is dictated by the market more than it is the fed. The further you go out on the yield curve, the less you are pinned to the fed rate and the more you are affected by the market. The cash rate is not as random because it is more dictated by the fed than the market. As you stated, I don't think the fed will ever allow the curve to stay inverted for a whole decade. It may last a few years at times, but the inversion tends to correct itself one way or another.
Ok good. This is all in retrospect pretty obvious right? If we are to believe that 2Y treasuries will likely have a positive Sharpe then, given that it's currently on track to a negative Sharpe, we believe it is more likely that the curve "straightens" back up than further inverts. Whether that's from Fed policy or otherwise does not actually matter.


4) If we (and the market) have a very reasonable expectation that the Fed will cut its rate (and everyone thinks so), this would explain a piling into the 2Y treasuries. So from a return perspective for the upcoming 2 years, what is riskier? Buying and holding 2Y bonds or investing in cash and reinvesting every 3 months. Which one is less likely to produce its expected return (1.5% for one and 1.7% for the other).
If I were to place all my money in a single investment, I agree that putting it in cash at the moment makes the most sense. However, I'm not placing all of my money in a single investment. I am trying to implement a 2 coin flip scenario as described in my post at the link below. If I were to put half my risk in stocks and half my risk in cash, I would just have a 50% diluted stock portfolio. It is very possible that my leveraged bond coin will flip negative returns over the next couple years due to the inversion, but that doesn't mean I should go back to flipping just a single coin (i.e. stocks). While the odds may be a little less due to the inversion, there is still a very real possibility that the leveraged bond coin will continue to flip positive over the next couple years. That is why I continue to flip two coins...you never know what will come next.

https://theleveragedindexer.com/2019/08 ... ged-bonds/
How do you get SPY1955 and SHY1955? Thanks

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

Post by rascott » Wed Oct 09, 2019 11:57 am

RandomWord wrote:
Tue Oct 08, 2019 4:35 pm
rascott wrote:
Tue Oct 08, 2019 1:31 pm
RandomWord wrote:
Tue Oct 08, 2019 1:16 pm
305pelusa wrote:
Tue Oct 08, 2019 1:15 pm
rascott wrote:
Tue Oct 08, 2019 11:34 am



Yeah they have a tool:

https://www.cmegroup.com/tools-informat ... ytics.html

But it's made me even more confused as the implied repo rates on the individual contracts are all over the place and seem to change drastically by the hour.
Oh haha. Yeah that is confusing. Not sure what to tell you. It's not the first time that I see financing rates on derivatives that don't make much sense to me. Beware Rascott!
Is it that surprising that the finance rates would change by the hour? it's a fast moving market, of course they're going to change. Every time bond prices change, the implied repo rate will also change.

I mean that tool is currently showing a negative implied repo rate for the Ultra bond! What? It was at roughly 1.6% this morning.

So they are paying me to borrow to buy that contract?
Hmm, that does seem like a pretty wild swing. Maybe that tool doesn't always pick up the right cheapest-to-deliver bond? But I'm just speculating. Looking at it now, i don't see any where the CTD is negative. It would be nice if someone with access to a bloomberg terminal could weigh in here, since that might have better data.

The Ultra 30 yr is back to a negative repo rate today... even more so.... at -1.44%.

The regular 30 year is at basically 0%

As you go further out the yield curve the repo rates continually drop. The 2 yr is the highest at 1.9%.

There must be some rationale for why this occurs.

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

Post by EfficientInvestor » Wed Oct 09, 2019 4:32 pm

Diego_Quant wrote:
Wed Oct 09, 2019 11:17 am
How do you get SPY1955 and SHY1955? Thanks
You can pull S&P 500 index data from Yahoo Finance going back to 1928 (https://finance.yahoo.com/quote/%5EGSPC ... equency=1d). Then you can add in dividends to that to determine total return. Approximate SHY returns can be calculated from historical treasury yield data. This article explains how you can do that: https://portfoliocharts.com/bond-index-calculator/. And there is this thread started by longinvest: (viewtopic.php?f=10&t=179425) siamond, who helps keep the Simba spreadsheet up to date (viewtopic.php?f=10&t=2520), was kind enough to share some monthly data that is similar to the data used to feed into the Simba spreadsheet. However, he asked that it not be widely distributed. I believe these data sets were developed in a similar fashion to what is outlined above.

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

Post by Hydromod » Wed Oct 09, 2019 5:18 pm

Where do you get the dividends from?

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

Post by EfficientInvestor » Wed Oct 09, 2019 5:29 pm

Hydromod wrote:
Wed Oct 09, 2019 5:18 pm
Where do you get the dividends from?
You can get total return data from VFINX going back to 1985 from Portfolio Visualizer. For years prior, you can get data here: https://www.multpl.com/s-p-500-dividend/table/by-year. I can’t recall if this is the source I pulled data from in the past, but it was the first source to pop up on the google search I just did. I cant remember if siamond had a total return data set that he pulled from somewhere else or if he split the dividends across the year and then added that to the index performance.
Last edited by EfficientInvestor on Wed Oct 09, 2019 5:32 pm, edited 1 time in total.

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

Post by Diego_Quant » Wed Oct 09, 2019 5:30 pm

Thanks!!
Last edited by Diego_Quant on Wed Oct 09, 2019 5:36 pm, edited 2 times in total.

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

Post by Hydromod » Wed Oct 09, 2019 5:31 pm

So then just spread dividends uniformly across the year? That's what I would assume.

get_g0ing
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by get_g0ing » Wed Oct 09, 2019 5:34 pm

Question for those doing this in taxable:

Did you analyze/compare NTSX vs UPRO/TMF, in terms of which would be better in taxable?

Thanks.

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

Post by pitnerh » Wed Oct 09, 2019 5:48 pm

Why should I prioritize retirement over non-retirement investing? I realize that planning for the future is important but I would like to know more about the benefits.

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

Post by MotoTrojan » Wed Oct 09, 2019 6:04 pm

get_g0ing wrote:
Wed Oct 09, 2019 5:34 pm
Question for those doing this in taxable:

Did you analyze/compare NTSX vs UPRO/TMF, in terms of which would be better in taxable?

Thanks.
NTSX is light years better in taxable, but it’s way less leverage.

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

Post by HawkeyePierce » Wed Oct 09, 2019 6:11 pm

get_g0ing wrote:
Wed Oct 09, 2019 5:34 pm
Question for those doing this in taxable:

Did you analyze/compare NTSX vs UPRO/TMF, in terms of which would be better in taxable?

Thanks.
Aside from the fact both use leverage, NTSX and UPRO/TMF have extremely little in common. They shouldn't be conflated with each other.

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