HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by Impatience » Fri Jul 31, 2020 4:05 pm

I think the conversation quite naturally followed course to a similar strategy. Both are mostly hands-off except for rebalancing and both are predicated on the idea of hedging with uncorrelated assets - particularly leveraged ones. It’s silly to say that Hedgefundie’s original (and great, and brilliant) proposal is appropriate and sound for Bogleheads but this other derivative version that is inspired by it is somehow beyond the pale. If you’re willing to entertain the original idea then you ought to be able to entertain the “short” version even if you know it’s absolutely NOT something you want to pursue in your own portfolio. IMO this whole thread is pretty far beyond what is Boglehead appropriate but this place attracts a lot of smart, financially curious people (I’m only the latter) and so here we are.

Edit: one other point I think it’s good for these topics to be “contained” to one or two threads only because they are in fact not very Bogle-y at all and I don’t think it would serve the forum’s goals well for them to spawn into many different active threads discussing wild strategies

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

Post by Semantics » Fri Jul 31, 2020 4:29 pm

langlands wrote:
Fri Jul 31, 2020 2:49 pm
I don't believe in free lunches. The cost of the options are in all likelihood exactly the cost of insuring against a catastrophic blowup. Do you have a theoretical reason why the cost of these options should be less? If so, that sounds like the beginning of a very profitable options trading strategy.

You've said that monthly rebalancing does better than quarterly rebalancing and that weekly or daily rebalancing would be even better. Are you forgetting that the entire reason the backtesting seems to show great results is because of volatility decay (beta slippage)? What do you think beta slippage is when you rebalance your short SQQQ position daily? (It's the same as holding a long TQQQ position).

Here is the comparison that RocketshipTech brought up earlier:
https://www.portfoliovisualizer.com/bac ... ion4_2=110

Note where all the outperformance comes from: August 2011 and March 2020. Guess what happened then? That's right, the market tanked. Would the strategy really have gone that entire month without rebalancing?
This is the real salient point I think. The backtests assume that when the market drops between rebalancing periods you will meet the margin requirements without doing anything, and that is where you pay for the lunch. The returns and Sharpe would be roughly identical with daily rebalancing, since, after all, you'd have identical market exposure each day.

Conversely, if you look at the monthly returns on PV, in most of the months where TQQQ does best, -SQQQ lags far behind. That's because TQQQ is benefitting from positive compounding throughout the month while -SQQQ is held back by negative compounding. But since there are more neutral+bad months than good months, -SQQQ does better overall.

Maybe another way of looking at it is that the market tends to recover from intermittent spikes, and during such spikes -SQQQ leaves you with more market exposure while TQQQ leaves you with less market exposure. This works in favor of -SQQQ as long as things recover before rebalancing and as long as you can meet margin. So -SQQQ likely would have done much worse than TQQQ in the early 2000s (well, they both would have been wiped out, but -SQQQ probably more rapidly).

Edit: Apropos a post I made just before this shorting subtopic, one can isolate the beta slippage this shorting strategy benefits with a daily trading strategy that just sells QQQ when it goes up and buys it when it goes down, in appropriate amounts. So do the traditional 55/45 strategy, and then run this outside of it, and accumulate the bonus gains of the short portfolio. This will make it way easier to understand the risks, and where the lunch money comes from. In particular, if QQQ were to drop a lot, you'd need to buy a ton of it on margin. (As before, I'm not suggesting implementing this, it's just a good way to isolate the difference between -SQQQ and TQQQ to make it look less like magic.)
Last edited by Semantics on Fri Jul 31, 2020 4:54 pm, edited 1 time in total.

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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Fri Jul 31, 2020 4:48 pm

langlands wrote:
Fri Jul 31, 2020 2:49 pm
LadyGeek wrote:
Fri Jul 31, 2020 1:13 pm
Thereum wrote:
Fri Jul 31, 2020 12:12 pm
I am not sure why it's hard to see the theoretical benefits of shorting leveraged inverse ETFs, especially if you believe the markets will continue to trend upward and experience more up days than down days. The biggest risk of this strategy is getting a margin call due to a sharp drawdown, which is why I suggest using options to limit risk. The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
I'd like to interject a very big caution to investors who are following this thread, but may not have the experience to understand the implications of Thereum's post. The tenet "Never invest in anything you don't understand" applies here for a very good reason (Thereum understands, I'm worried about investors who may not.)

Please see this FINRA article: Purchasing on Margin, Risks Involved with Trading in a Margin Account (additional risks) You can literally lose everything. Period.
I contend that Thereum in fact doesn't understand. Look Thereum, clearly you've put a lot of thought into this strategy and I admit it's quite intriguing. You know how to backtest it properly and know where the risks are.

But one thing I don't see is a theoretical understanding of the benefits of shorting leveraged inverse ETFs that you claim. Picking up beta slippage (volatility decay) isn't free money. It's a form of negative return skew, i.e. picking up pennies in front of the steamroller, i.e. collecting an insurance premium. You seem to understand this, which is why you're hedging with options. You say that
The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
I don't believe in free lunches. The cost of the options are in all likelihood exactly the cost of insuring against a catastrophic blowup. Do you have a theoretical reason why the cost of these options should be less? If so, that sounds like the beginning of a very profitable options trading strategy.

You've said that monthly rebalancing does better than quarterly rebalancing and that weekly or daily rebalancing would be even better. Are you forgetting that the entire reason the backtesting seems to show great results is because of volatility decay (beta slippage)? What do you think beta slippage is when you rebalance your short SQQQ position daily? (It's the same as holding a long TQQQ position).

Here is the comparison that RocketshipTech brought up earlier:
https://www.portfoliovisualizer.com/bac ... ion4_2=110

Note where all the outperformance comes from: August 2011 and March 2020. Guess what happened then? That's right, the market tanked. Would the strategy really have gone that entire month without rebalancing?
"I don't believe in free lunches. The cost of the options are in all likelihood exactly the cost of insuring against a catastrophic blowup. Do you have a theoretical reason why the cost of these options should be less? If so, that sounds like the beginning of a very profitable options trading strategy"
This is the key problem around all this "strategy".It would be needed an accurate mathematical calculation in order to be sure at 100% otherwise it is pure gambling.
And afterall,what do you think would happen to this options+inverse leveraged ETFs portfolio if interest rates are gonna raise ?
I have seen the light

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

Post by Thereum » Fri Jul 31, 2020 4:54 pm

danyboy7 wrote:
Fri Jul 31, 2020 4:48 pm
And afterall,what do you think would happen to this options+inverse leveraged ETFs portfolio if interest rates are gonna raise ?
It will do a heck of a lot better than the long 3x ETF portfolios.

In fact, even if rates rise, there is a very good chance that TMV (short LTT) will be down because the rate change will happen gradually and with volatility. TMF (long LTT) will be down substantially if this happens.


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

Post by Steve Reading » Fri Jul 31, 2020 5:45 pm

Impatience wrote:
Fri Jul 31, 2020 11:17 am
Steve Reading wrote:
Thu Jul 30, 2020 11:16 pm
I freaking love that this thread went from discussing portfolios where volatility decay hurts, straight to portfolios where volatility decay actually helps you.

"If you can't beat them, join them".
I’m not 100% convinced that volatility decay actually helps when it comes to shorting LETFs. Or if it does that the help is meaningful. A lot of the math I see on the subject seems kind of uninformed and I’m not smart enough to say for sure if I believe it. I think the edge may come from some other element of shorting vs holding. Also part of me suspects maybe PortfolioVisualizer is making either an error or a hidden assumption in its handling of the shorted LETF backtest. I’m not sure. Something is missing.
Going long a LETF has volatility decay because you increase exposure as the market increases and vice-versa. But by shorting an inverse ETF, you actually decrease exposure as the market rises (market rises, LETF drops in value and exposure, so your exposure via the short also drops). I don't know about the math or links or backtests, but shorting an inverse ETF theoretically should produce the opposite of volatility decay.

Of course, that also means increasing exposure as markets drop. Important to keep that in mind.
"... 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

keith6014
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by keith6014 » Fri Jul 31, 2020 9:20 pm

randyharris wrote:
Fri Jul 31, 2020 5:26 pm
July is done, quite a month.

Image


Risk Parity https://www.portfoliovisualizer.com/tes ... odWeight=0


Risk Parity Max https://www.portfoliovisualizer.com/tes ... odWeight=0
the y axis needs more ticks. $10,000 to ?

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

Post by physixfan » Fri Jul 31, 2020 9:50 pm

Semantics wrote:
Fri Jul 31, 2020 4:29 pm
langlands wrote:
Fri Jul 31, 2020 2:49 pm
I don't believe in free lunches. The cost of the options are in all likelihood exactly the cost of insuring against a catastrophic blowup. Do you have a theoretical reason why the cost of these options should be less? If so, that sounds like the beginning of a very profitable options trading strategy.

You've said that monthly rebalancing does better than quarterly rebalancing and that weekly or daily rebalancing would be even better. Are you forgetting that the entire reason the backtesting seems to show great results is because of volatility decay (beta slippage)? What do you think beta slippage is when you rebalance your short SQQQ position daily? (It's the same as holding a long TQQQ position).

Here is the comparison that RocketshipTech brought up earlier:
https://www.portfoliovisualizer.com/bac ... ion4_2=110

Note where all the outperformance comes from: August 2011 and March 2020. Guess what happened then? That's right, the market tanked. Would the strategy really have gone that entire month without rebalancing?
This is the real salient point I think. The backtests assume that when the market drops between rebalancing periods you will meet the margin requirements without doing anything, and that is where you pay for the lunch. The returns and Sharpe would be roughly identical with daily rebalancing, since, after all, you'd have identical market exposure each day.

Conversely, if you look at the monthly returns on PV, in most of the months where TQQQ does best, -SQQQ lags far behind. That's because TQQQ is benefitting from positive compounding throughout the month while -SQQQ is held back by negative compounding. But since there are more neutral+bad months than good months, -SQQQ does better overall.

Maybe another way of looking at it is that the market tends to recover from intermittent spikes, and during such spikes -SQQQ leaves you with more market exposure while TQQQ leaves you with less market exposure. This works in favor of -SQQQ as long as things recover before rebalancing and as long as you can meet margin. So -SQQQ likely would have done much worse than TQQQ in the early 2000s (well, they both would have been wiped out, but -SQQQ probably more rapidly).

Edit: Apropos a post I made just before this shorting subtopic, one can isolate the beta slippage this shorting strategy benefits with a daily trading strategy that just sells QQQ when it goes up and buys it when it goes down, in appropriate amounts. So do the traditional 55/45 strategy, and then run this outside of it, and accumulate the bonus gains of the short portfolio. This will make it way easier to understand the risks, and where the lunch money comes from. In particular, if QQQ were to drop a lot, you'd need to buy a ton of it on margin. (As before, I'm not suggesting implementing this, it's just a good way to isolate the difference between -SQQQ and TQQQ to make it look less like magic.)
Yeah. Shorting -3x ETFs is better than longing +3x ETFs if and only if the market recovers before rebalancing. I think a really big caveat is that, since SQQQ/SPXU are created, the U.S. market really does not have a big downturn that lasts more than a few months. If rebalanced monthly, shorting SQQQ/SPXU performed much better than longing TQQQ/UPRO in months like Mar 2020. However, if the downturn lasts for quite a few months, then shorting SQQQ/SPXU with monthly rebalancing would be a disaster. I backtested with LETF for another country to finally realized this caveat. There is a similar -3x ETF called YANG for China stock market. In 2015-2016, the China stock market had a long-lasting downturn. Shoring YANG behaved really good with annual rebalancing, but really bad if rebalanced monthly.

hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 » Sat Aug 01, 2020 3:46 am

End of July rebalancing done yesterday for my target volatility 25% strategy (signal from Portfoliovisualiser).

Feb UPRO 42% / TMF 58% Perf.: -9.3%
Mar UPRO 9% / TMF 91% Perf.: -10.9%
Apr UPRO 21% / TMF 79% Perf.: 6.7%
May UPRO 37% / TMF 63% Perf.: -3.0%
June UPRO 31% / TMF 69% Perf.: 0.3%
July UPRO 74% / TMF 26% Perf.: 10.7%

Interesting: within a month a change in the UPRO allocation from 31% to 74%. (I had to check twice.)

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

Post by djeayzonne » Sat Aug 01, 2020 5:19 am

I would really like to know how people are actually implementing the adaptive allocation method.

Including the theory on why you are using the specific signals you are as well as what tools and how they are actually set up.

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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Sat Aug 01, 2020 7:06 am

djeayzonne wrote:
Sat Aug 01, 2020 5:19 am
I would really like to know how people are actually implementing the adaptive allocation method.

Including the theory on why you are using the specific signals you are as well as what tools and how they are actually set up.
Me too ! Really curious if someone is willing to make a detailed operative post :wink:
I have seen the light

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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Sat Aug 01, 2020 7:07 am

hilink73 wrote:
Sat Aug 01, 2020 3:46 am
End of July rebalancing done yesterday for my target volatility 25% strategy (signal from Portfoliovisualiser).

Feb UPRO 42% / TMF 58% Perf.: -9.3%
Mar UPRO 9% / TMF 91% Perf.: -10.9%
Apr UPRO 21% / TMF 79% Perf.: 6.7%
May UPRO 37% / TMF 63% Perf.: -3.0%
June UPRO 31% / TMF 69% Perf.: 0.3%
July UPRO 74% / TMF 26% Perf.: 10.7%

Interesting: within a month a change in the UPRO allocation from 31% to 74%. (I had to check twice.)
Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
I have seen the light

hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 » Sat Aug 01, 2020 10:20 am

danyboy7 wrote:
Sat Aug 01, 2020 7:07 am
hilink73 wrote:
Sat Aug 01, 2020 3:46 am
End of July rebalancing done yesterday for my target volatility 25% strategy (signal from Portfoliovisualiser).

Feb UPRO 42% / TMF 58% Perf.: -9.3%
Mar UPRO 9% / TMF 91% Perf.: -10.9%
Apr UPRO 21% / TMF 79% Perf.: 6.7%
May UPRO 37% / TMF 63% Perf.: -3.0%
June UPRO 31% / TMF 69% Perf.: 0.3%
July UPRO 74% / TMF 26% Perf.: 10.7%

Interesting: within a month a change in the UPRO allocation from 31% to 74%. (I had to check twice.)
Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
It's not adaptive allocation, but target volatility:
https://www.portfoliovisualizer.com/tes ... ndowSize=1
Out of market asset: TMF
Asset 1: UPRO 80%
Asset 2: TMF 20%

The asset allocation for the next month is only available in the paid version, though.

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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Sat Aug 01, 2020 10:49 am

hilink73 wrote:
Sat Aug 01, 2020 10:20 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am
hilink73 wrote:
Sat Aug 01, 2020 3:46 am
End of July rebalancing done yesterday for my target volatility 25% strategy (signal from Portfoliovisualiser).

Feb UPRO 42% / TMF 58% Perf.: -9.3%
Mar UPRO 9% / TMF 91% Perf.: -10.9%
Apr UPRO 21% / TMF 79% Perf.: 6.7%
May UPRO 37% / TMF 63% Perf.: -3.0%
June UPRO 31% / TMF 69% Perf.: 0.3%
July UPRO 74% / TMF 26% Perf.: 10.7%

Interesting: within a month a change in the UPRO allocation from 31% to 74%. (I had to check twice.)
Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
It's not adaptive allocation, but target volatility:
https://www.portfoliovisualizer.com/tes ... ndowSize=1
Out of market asset: TMF
Asset 1: UPRO 80%
Asset 2: TMF 20%

The asset allocation for the next month is only available in the paid version, though.
Alright,thanks a lot.Did you understood how to implement the adaptive allocation ? And what's the pro of volatility version one ? It seems to me that it constantly underperforms the original version or am I wrong ?
I have seen the light

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

Post by Kbg » Sat Aug 01, 2020 11:04 am

Old guy comment, I assume you are familiar with Nasdaq 100 history when considering shorting SQQQ? I hope so.

hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 » Sat Aug 01, 2020 11:13 am

danyboy7 wrote:
Sat Aug 01, 2020 10:49 am
Did you understood how to implement the adaptive allocation ?
No.
I've said some time ago that it feels quite counter-intuitive to sometimes sell with losses using this strategy.
In the original strategy, there's classical rebalancing, thus selling high, buying low, which might be easier to follow.
And what's the pro of volatility version one ? It seems to me that it constantly underperforms the original version or am I wrong ?
It performed better for the last 10 years, I think.
The strategy was being discussed in detail in this thread around beginning of year (if I remember correctly).

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

Post by randyharris » Sat Aug 01, 2020 11:22 am

keith6014 wrote:
Fri Jul 31, 2020 9:20 pm
randyharris wrote:
Fri Jul 31, 2020 5:26 pm
July is done, quite a month.

Image


Risk Parity https://www.portfoliovisualizer.com/tes ... odWeight=0


Risk Parity Max https://www.portfoliovisualizer.com/tes ... odWeight=0
the y axis needs more ticks. $10,000 to ?
I can't figure out how to get Google Sheets with Log to show more vertical axis points... Here's the month data.

Image

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

Post by firebirdparts » Sat Aug 01, 2020 11:47 am

danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
A fool and your money are soon partners

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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Sat Aug 01, 2020 12:20 pm

firebirdparts wrote:
Sat Aug 01, 2020 11:47 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
Thanks a lot.It's very difficult to get usefull info in this gigantic thread.Which strategy has the best cagr ?
I have seen the light

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

Post by cos » Sat Aug 01, 2020 12:40 pm

danyboy7 wrote:
Sat Aug 01, 2020 12:20 pm
firebirdparts wrote:
Sat Aug 01, 2020 11:47 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
Thanks a lot.It's very difficult to get usefull info in this gigantic thread.Which strategy has the best cagr ?
If we could tell you that, we'd all be using it.

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

Post by Thereum » Sat Aug 01, 2020 1:56 pm

danyboy7 wrote:
Sat Aug 01, 2020 12:20 pm
firebirdparts wrote:
Sat Aug 01, 2020 11:47 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
Thanks a lot.It's very difficult to get usefull info in this gigantic thread.Which strategy has the best cagr ?
Shorting leveraged inverse ETFs. It also has the highest Sharpe ratio.

The long leveraged ETF strategies are flawed in my view because there is no guarantee that leveraged ETFs can recover after substantial drawdowns. The 3x small cap ETFs had an 80% drawdown and might never return to all time highs. That the SP500 leveraged ETFs did not perform as badly is luck. Conversely, all of the inverse leveraged ETFs -- including the small caps -- have already made new lows after the March crash.

Let me ask this: Is anyone beginning to see the flaws of going long on 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 » Sat Aug 01, 2020 2:01 pm

Thereum wrote:
Sat Aug 01, 2020 1:56 pm
Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs and the advantages of instead going short on leveraged ETFs?
I'm not sure they're "flaws" or "advantages". They're just changes in various exposures. Going long LETFs maintains leverage, which decreases exposure after drops and vice-versa. Using futures maintains roughly the same exposure and hence increases leverage after market drops. And shorting an inverse increases exposure after market drops, provided you continue to short the same number of shares. So leverage sky-rockets.

If markets recover after a drop, then shorting the inverse will be the best, with futures/options next and LETFs last. But it also goes the other way if markets kept dropping. Ditto for market increases.

I'd say you have to pick what behavior you want and then use the correct tool for it.
"... 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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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 » Sat Aug 01, 2020 2:13 pm

Thereum wrote:
Sat Aug 01, 2020 1:56 pm
danyboy7 wrote:
Sat Aug 01, 2020 12:20 pm
firebirdparts wrote:
Sat Aug 01, 2020 11:47 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
Thanks a lot.It's very difficult to get usefull info in this gigantic thread.Which strategy has the best cagr ?
Shorting leveraged inverse ETFs. It also has the highest Sharpe ratio.

The long leveraged ETF strategies are flawed in my view because there is no guarantee that leveraged ETFs can recover after substantial drawdowns. The 3x small cap ETFs had an 80% drawdown and might never return to all time highs. That the SP500 leveraged ETFs did not perform as badly is luck. Conversely, all of the inverse leveraged ETFs -- including the small caps -- have already made new lows after the March crash.

Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs?
Allright Thereum so you're stating Inverse volatility is better than Minimum variance and Max Sharpe ratio,right ? Does the other 2 include the use of options and margin account too ?
I have seen the light

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

Post by Thereum » Sat Aug 01, 2020 2:15 pm

Steve Reading wrote:
Sat Aug 01, 2020 2:01 pm
Thereum wrote:
Sat Aug 01, 2020 1:56 pm
Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs and the advantages of instead going short on leveraged ETFs?
I'm not sure they're "flaws" or "advantages". They're just changes in various exposures. Going long LETFs maintains leverage, which decreases exposure after drops and vice-versa. Using futures maintains roughly the same exposure and hence increases leverage after market drops. And shorting an inverse increases exposure after market drops, provided you continue to short the same number of shares. So leverage sky-rockets.

If markets recover after a drop, then shorting the inverse will be the best, with futures/options next and LETFs last. But it also goes the other way if markets kept dropping. Ditto for market increases.

I'd say you have to pick what behavior you want and then use the correct tool for it.
The short strategy does not require a recovery. That is the beauty of it. If the market is choppy, then the leveraged ETFs will lose value. In fact, they have a good chance of losing value even if the market moves in the ETF''s direction, due to volatility decay.

As an example, consider the leveraged financial ETFs -- FAS and FAZ. The financial sector has not strongly recovered from the crash. The non-leveraged ETFs are still down about 25%. The bull 3x ETF is still down 70%. So the bear 3x ETF is probably up, right? Nope -- it's down 50% YTD!

If you were to start Hedgefundie's strategy on TMF and FAS, you'd be down slightly for the year. (TMF really saved you in this case, and this something you cannot bank on going forward.) On the other hand, the short leveraged inverse ETF strategy would be up 80%, even though the underlying financial sector index is down. The Sharpe ratio is also 3.57 for the short strategy vs -0.22 for the long strategy.

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

Post by wackerdr » Sat Aug 01, 2020 2:45 pm

Thereum wrote:
Sat Aug 01, 2020 2:15 pm
Steve Reading wrote:
Sat Aug 01, 2020 2:01 pm
Thereum wrote:
Sat Aug 01, 2020 1:56 pm
Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs and the advantages of instead going short on leveraged ETFs?
I'm not sure they're "flaws" or "advantages". They're just changes in various exposures. Going long LETFs maintains leverage, which decreases exposure after drops and vice-versa. Using futures maintains roughly the same exposure and hence increases leverage after market drops. And shorting an inverse increases exposure after market drops, provided you continue to short the same number of shares. So leverage sky-rockets.

If markets recover after a drop, then shorting the inverse will be the best, with futures/options next and LETFs last. But it also goes the other way if markets kept dropping. Ditto for market increases.

I'd say you have to pick what behavior you want and then use the correct tool for it.
The short strategy does not require a recovery. That is the beauty of it. If the market is choppy, then the leveraged ETFs will lose value. In fact, they have a good chance of losing value even if the market moves in the ETF''s direction, due to volatility decay.

As an example, consider the leveraged financial ETFs -- FAS and FAZ. The financial sector has not strongly recovered from the crash. The non-leveraged ETFs are still down about 25%. The bull 3x ETF is still down 70%. So the bear 3x ETF is probably up, right? Nope -- it's down 50% YTD!

If you were to start Hedgefundie's strategy on TMF and FAS, you'd be down slightly for the year. (TMF really saved you in this case, and this something you cannot bank on going forward.) On the other hand, the short leveraged inverse ETF strategy would be up 80%, even though the underlying financial sector index is down. The Sharpe ratio is also 3.57 for the short strategy vs -0.22 for the long strategy.
Thereum,

I tried to get an accurate picture of the how to execute your strategy. But I am not able to .

Can you please post a set of succinct steps , preferably with example trades that you would do to put the strategy in motion. I am long on TQQQ/TMF in 70:30 since June in my IRA . It has done really well with about 35% increase in portfolio size , but curious about the strategy you are suggesting. it has to be done in taxable as I understand.

Than you.

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

Post by hilink73 » Sat Aug 01, 2020 3:12 pm

wackerdr wrote:
Sat Aug 01, 2020 2:45 pm
I am long on TQQQ/TMF in 70:30 since June in my IRA . It has done really well with about 35% increase in portfolio size ,
June which year?

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

Post by Steve Reading » Sat Aug 01, 2020 3:13 pm

Thereum wrote:
Sat Aug 01, 2020 2:15 pm

As an example, consider the leveraged financial ETFs -- FAS and FAZ. The financial sector has not strongly recovered from the crash. The non-leveraged ETFs are still down about 25%. The bull 3x ETF is still down 70%. So the bear 3x ETF is probably up, right? Nope -- it's down 50% YTD!
That makes perfect sense. Again, shorting an inverse ETF increases exposure as market drops. So once the market begins to recover, you'll break even before full recovery.
LETF => Takes more than full market recovery to break even.
Futures/Options => Recovers once the market recovers.
Shorting an inverse => Recovers well before the market recovers.

Shorting an inverse ETF is nothing more than overbalancing into an asset. So then you don't need a complete recovery to break even. Some amount of recovery will be enough.

But this isn't a free lunch. If the drop is large enough, there will come a point when you cannot maintain exposure. It's already hard enough to maintain exposure with futures and market drops. Let alone increasing exposure.

In other words, FAZ more than tripled in value during March. Could you have even maintained that kind of short without covering? I bet not unless the amount in this Adventure is small compared to your collateral.
"... 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

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

Post by wackerdr » Sat Aug 01, 2020 3:19 pm

hilink73 wrote:
Sat Aug 01, 2020 3:12 pm
wackerdr wrote:
Sat Aug 01, 2020 2:45 pm
I am long on TQQQ/TMF in 70:30 since June in my IRA . It has done really well with about 35% increase in portfolio size ,
June which year?
This year.

hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 » Sat Aug 01, 2020 3:54 pm

wackerdr wrote:
Sat Aug 01, 2020 3:19 pm
hilink73 wrote:
Sat Aug 01, 2020 3:12 pm
wackerdr wrote:
Sat Aug 01, 2020 2:45 pm
I am long on TQQQ/TMF in 70:30 since June in my IRA . It has done really well with about 35% increase in portfolio size ,
June which year?
This year.

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

Post by Semantics » Sat Aug 01, 2020 5:48 pm

Thereum wrote:
Sat Aug 01, 2020 1:56 pm
danyboy7 wrote:
Sat Aug 01, 2020 12:20 pm
firebirdparts wrote:
Sat Aug 01, 2020 11:47 am
danyboy7 wrote:
Sat Aug 01, 2020 7:07 am

Are you using the adaptive allocation method ? So overall you get a -5.5% performance if I'm not wrong
There are 4 methods in there for adaptive allocation timing models. Risk parity and inverse volatility are the same one in this case, so it's really just 3 in this case. The other two are "minimum variance" and "max Sharpe Ratio".

So target volatility is under a different menu heading, for whatever reason.
Thanks a lot.It's very difficult to get usefull info in this gigantic thread.Which strategy has the best cagr ?
Shorting leveraged inverse ETFs. It also has the highest Sharpe ratio.

The long leveraged ETF strategies are flawed in my view because there is no guarantee that leveraged ETFs can recover after substantial drawdowns. The 3x small cap ETFs had an 80% drawdown and might never return to all time highs. That the SP500 leveraged ETFs did not perform as badly is luck. Conversely, all of the inverse leveraged ETFs -- including the small caps -- have already made new lows after the March crash.

Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs?
But that is simply not true. Shorting 3x small cap in March (TZA) would have resulted in a margin call and your entire portfolio being liquidated. The additional margin needed in March was more than the entire portfolio value at the end of February. I am not sure you understand the mechanics of implementing this strategy. Portfolio Visualizer is not a real brokerage.

(Assuming -55% TZA and 45% TMF.)
Last edited by Semantics on Sat Aug 01, 2020 6:29 pm, edited 1 time in total.

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

Post by cos » Sat Aug 01, 2020 6:03 pm

Semantics wrote:
Sat Aug 01, 2020 5:48 pm
But that is simply not true. Shorting 3x small cap in March (TZA) would have resulted in a margin call and your entire portfolio being liquidated. The additional margin needed in March was more than the entire portfolio value at the end of February. I am not sure you understand the mechanics of implementing this strategy. Portfolio Visualizer is not a real brokerage.
+1. Until somebody lays out a reasonable methodology for implementing this strategy with a real broker and demonstrates its viability with real money, I don't believe it's worth discussing further. Everything suggested thus far requires heavy involvement far more frequent than mere quarterly or monthly rebalancing, and the odds of making a costly mistake are incredibly high.

I agree that this is a superior strategy on paper; I just don't see it working in practice.

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

Post by keith6014 » Sat Aug 01, 2020 6:54 pm

randyharris wrote:
Sat Aug 01, 2020 11:22 am
keith6014 wrote:
Fri Jul 31, 2020 9:20 pm
randyharris wrote:
Fri Jul 31, 2020 5:26 pm
July is done, quite a month.

Image


Risk Parity https://www.portfoliovisualizer.com/tes ... odWeight=0


Risk Parity Max https://www.portfoliovisualizer.com/tes ... odWeight=0
the y axis needs more ticks. $10,000 to ?
I can't figure out how to get Google Sheets with Log to show more vertical axis points... Here's the month data.

Image
10% in July. Not bad! MorningStart has my Personal Return @ %14.80 for UPRO:TMF. Up 20% for 65:35 (TQQQ:TMF).

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

Post by Thereum » Sat Aug 01, 2020 6:56 pm

cos wrote:
Sat Aug 01, 2020 6:03 pm
Semantics wrote:
Sat Aug 01, 2020 5:48 pm
But that is simply not true. Shorting 3x small cap in March (TZA) would have resulted in a margin call and your entire portfolio being liquidated. The additional margin needed in March was more than the entire portfolio value at the end of February. I am not sure you understand the mechanics of implementing this strategy. Portfolio Visualizer is not a real brokerage.
+1. Until somebody lays out a reasonable methodology for implementing this strategy with a real broker and demonstrates its viability with real money, I don't believe it's worth discussing further. Everything suggested thus far requires heavy involvement far more frequent than mere quarterly or monthly rebalancing, and the odds of making a costly mistake are incredibly high.

I agree that this is a superior strategy on paper; I just don't see it working in practice.
I've recommended using options and have backtested numerous strategies using ORATs. Almost all show great results.

I have implemented a few trades already, but I haven't committed any real capital until I figure out an approach I am confident in. Right now, I am shorting ITM call spreads and buying ATM puts.

Here are my open positions on SQQQ and TMV: https://i.imgur.com/LYACYhN.png

I have a lot more ideas that I am testing. What I am leaning toward is regularly opening trades in the longest-dated options.

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

Post by Semantics » Sat Aug 01, 2020 7:55 pm

The options strategy would still have been wiped out if the expiry date was mid-March. You lessen the likelihood of this by buying multiple options across expiry dates, but in a prolonged downturn like in 2000 or 2008 it's still possible that all of the puts could be worthless and you're stuck repeatedly paying out the max loss on the credit spreads.

Also, do your backtests account for the cost of having to maintain margin to back the spread? Or the unrealized gains that are tied up in the option and can't be redeployed until you decide to roll forward? If SQQQ drops to say $3 next month, you'll either have to close your positions early for less profit than with short selling, or keep them open but have $4 (intrinsic value fo put) tied up that isn't being compounded and that's going to be a drag.

The worst part of this strategy though, by far, is that you will constantly be realizing short term capital gains and paying taxes. With TQQQ you defer taxes until you sell, and likely would end up mostly with long-term gains. With -SQQQ you pay short term gains, but you can at least defer the taxes until you close positions and compound in the meantime. I can't fathom any way to make more money after taxes with this strategy than long TQQQ+TMF unless you're in a really low income tax bracket. You could use LEAPS and hold them for at least a year, but then you have the problem I mentioned above where your gains take up to a year to be reinvested and start compounding.

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

Post by physixfan » Sat Aug 01, 2020 8:35 pm

Thereum wrote:
Sat Aug 01, 2020 6:56 pm
cos wrote:
Sat Aug 01, 2020 6:03 pm
Semantics wrote:
Sat Aug 01, 2020 5:48 pm
But that is simply not true. Shorting 3x small cap in March (TZA) would have resulted in a margin call and your entire portfolio being liquidated. The additional margin needed in March was more than the entire portfolio value at the end of February. I am not sure you understand the mechanics of implementing this strategy. Portfolio Visualizer is not a real brokerage.
+1. Until somebody lays out a reasonable methodology for implementing this strategy with a real broker and demonstrates its viability with real money, I don't believe it's worth discussing further. Everything suggested thus far requires heavy involvement far more frequent than mere quarterly or monthly rebalancing, and the odds of making a costly mistake are incredibly high.

I agree that this is a superior strategy on paper; I just don't see it working in practice.
I've recommended using options and have backtested numerous strategies using ORATs. Almost all show great results.

I have implemented a few trades already, but I haven't committed any real capital until I figure out an approach I am confident in. Right now, I am shorting ITM call spreads and buying ATM puts.

Here are my open positions on SQQQ and TMV: https://i.imgur.com/LYACYhN.png

I have a lot more ideas that I am testing. What I am leaning toward is regularly opening trades in the longest-dated options.
Do you know the theta of the options in volatile time like Mar 2020 or in the year of 2008/2009? Is theta basically the same as today?

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

Post by Thereum » Sat Aug 01, 2020 9:15 pm

Semantics wrote:
Sat Aug 01, 2020 7:55 pm
The options strategy would still have been wiped out if the expiry date was mid-March. You lessen the likelihood of this by buying multiple options across expiry dates, but in a prolonged downturn like in 2000 or 2008 it's still possible that all of the puts could be worthless and you're stuck repeatedly paying out the max loss on the credit spreads.

Also, do your backtests account for the cost of having to maintain margin to back the spread? Or the unrealized gains that are tied up in the option and can't be redeployed until you decide to roll forward? If SQQQ drops to say $3 next month, you'll either have to close your positions early for less profit than with short selling, or keep them open but have $4 (intrinsic value fo put) tied up that isn't being compounded and that's going to be a drag.

The worst part of this strategy though, by far, is that you will constantly be realizing short term capital gains and paying taxes. With TQQQ you defer taxes until you sell, and likely would end up mostly with long-term gains. With -SQQQ you pay short term gains, but you can at least defer the taxes until you close positions and compound in the meantime. I can't fathom any way to make more money after taxes with this strategy than long TQQQ+TMF unless you're in a really low income tax bracket. You could use LEAPS and hold them for at least a year, but then you have the problem I mentioned above where your gains take up to a year to be reinvested and start compounding.
These options positions would not have been wiped out. They are defined risk trades because of the long calls. They wouldn't have lost much value at all during the March crash, unless they were close to expiration.

As for your second point, as the account equity value grows, the amount of buying power will grow. The margin requirements will stay the same with Reg T margin or decrease with portfolio margin. I believe you can compound your profits very quickly, although that could be risky. I am not sure how ORATS handles this, but I assume that they aren't as liberal with risk as portfolio margin would allow.

You are right about taxes. I am considering focusing my trading on options that expire over a year in the future and holding the positions for at least a year before closing. TMV and SQQQ both have options expiring Jan 2022, and 2023 should be added soon. Unfortunately, there aren't as many long term expiration dates for these products as there are for others stocks and ETFs. I will probably end up with a mixture of short term and long term capital gains, which is fine by me if I am able to get an 80% CAGR.

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

Post by ChrisBenn » Sat Aug 01, 2020 9:27 pm

Thereum wrote:
Sat Aug 01, 2020 9:15 pm
(...)
I will probably end up with a mixture of short term and long term capital gains, which is fine by me if I am able to get an 80% CAGR.
If the 80% number is from orats then I believe they report the arithmetic mean, not cagr (at least they did for the short stock backtests)

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

Post by RocketShipTech » Sat Aug 01, 2020 9:31 pm

ChrisBenn wrote:
Sat Aug 01, 2020 9:27 pm
Thereum wrote:
Sat Aug 01, 2020 9:15 pm
(...)
I will probably end up with a mixture of short term and long term capital gains, which is fine by me if I am able to get an 80% CAGR.
If the 80% number is from orats then I believe they report the arithmetic mean, not cagr (at least they did for the short stock backtests)
Lol this just gets better and better

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

Post by Steve Reading » Sat Aug 01, 2020 11:09 pm

Thereum wrote:
Sat Aug 01, 2020 6:56 pm
Here are my open positions on SQQQ and TMV: https://i.imgur.com/LYACYhN.png
Right so if you want to increase exposure as the market drops, then either you will get liquidated at a given market level OR you need to buy yourself insurance against SQQQ rising too much. Which is what your $12 calls are there for.

Let me ask you this: Have you been factoring in the cost of those SQQQ calls in all of the charts, backtests and arguments you've put forward? They won't be cheap you know. And they'll cut into your returns every year.

Consider selling some lower-strike-price puts to finance those calls. You limit your upside of course but markets would have to rise tremendously for a LETF position to pass a short inverse ETF position any ways. And then you could enjoy all of your anti-volatility decay gains at no additional cost and no risk of liquidation.

My point is that there isn't necessarily a free lunch here. Again, you have to ask yourself what you want to do with market movements (increase, decrease or maintain exposure) and pick the right tool. Of course, any strategy that maintains or increases exposure, will either have to accept a drawdown level at which you get liquidated, or lower initial leverage, or pays insurance against the declines, or limits its own upside to avoid full liquidation should the market drop enough. Pick your poison.
"... 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

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

Post by Semantics » Sat Aug 01, 2020 11:52 pm

Thereum wrote:
Sat Aug 01, 2020 9:15 pm
Semantics wrote:
Sat Aug 01, 2020 7:55 pm
The options strategy would still have been wiped out if the expiry date was mid-March. You lessen the likelihood of this by buying multiple options across expiry dates, but in a prolonged downturn like in 2000 or 2008 it's still possible that all of the puts could be worthless and you're stuck repeatedly paying out the max loss on the credit spreads.

Also, do your backtests account for the cost of having to maintain margin to back the spread? Or the unrealized gains that are tied up in the option and can't be redeployed until you decide to roll forward? If SQQQ drops to say $3 next month, you'll either have to close your positions early for less profit than with short selling, or keep them open but have $4 (intrinsic value fo put) tied up that isn't being compounded and that's going to be a drag.

The worst part of this strategy though, by far, is that you will constantly be realizing short term capital gains and paying taxes. With TQQQ you defer taxes until you sell, and likely would end up mostly with long-term gains. With -SQQQ you pay short term gains, but you can at least defer the taxes until you close positions and compound in the meantime. I can't fathom any way to make more money after taxes with this strategy than long TQQQ+TMF unless you're in a really low income tax bracket. You could use LEAPS and hold them for at least a year, but then you have the problem I mentioned above where your gains take up to a year to be reinvested and start compounding.
These options positions would not have been wiped out. They are defined risk trades because of the long calls. They wouldn't have lost much value at all during the March crash, unless they were close to expiration.
Yeah, but your risk is the max loss of the credit spread (assuming you always fully fund your puts with the spread). In theory, in order to come close to matching the expected returns of -SQQQ you would need to open enough of these spreads to match the full equity allocation (55% if doing 55/45). And in that case, the risk is the entire equity part of the portfolio. That ought to still not match the returns of -SQQQ though, since the risk of the latter is unbounded.

It's particularly notable that the puts are so expensive that the short call in the spread needs to be significantly in-the-money to fund the put purchase. So if SQQQ declines, but only moderately, to a price between the current price and the short call strike price, you get less returns at expiry than the -SQQQ approach.

If it didn't work this way there would be a pretty clear arbitrage opportunity. Put another way, if your method is strictly better, why take any risk at all? Why not just go long your strategy and short the Hedgefundie strategy and reap the returns with absolutely zero risk.
You are right about taxes. I am considering focusing my trading on options that expire over a year in the future and holding the positions for at least a year before closing. TMV and SQQQ both have options expiring Jan 2022, and 2023 should be added soon. Unfortunately, there aren't as many long term expiration dates for these products as there are for others stocks and ETFs. I will probably end up with a mixture of short term and long term capital gains, which is fine by me if I am able to get an 80% CAGR.
You could also trade options on $NDX (or $SPX), which has 60/40 treatment, if you're not tied to QQQ in particular.

hilink73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hilink73 » Sun Aug 02, 2020 3:23 am

This sounds more and more like wallstreetbets.
Maybe that's because I do not understand a thing about that stuff.

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

Post by Thereum » Sun Aug 02, 2020 4:41 pm

Steve Reading wrote:
Sat Aug 01, 2020 11:09 pm

Right so if you want to increase exposure as the market drops, then either you will get liquidated at a given market level OR you need to buy yourself insurance against SQQQ rising too much. Which is what your $12 calls are there for.

Let me ask you this: Have you been factoring in the cost of those SQQQ calls in all of the charts, backtests and arguments you've put forward? They won't be cheap you know. And they'll cut into your returns every year.

Consider selling some lower-strike-price puts to finance those calls. You limit your upside of course but markets would have to rise tremendously for a LETF position to pass a short inverse ETF position any ways. And then you could enjoy all of your anti-volatility decay gains at no additional cost and no risk of liquidation.

My point is that there isn't necessarily a free lunch here. Again, you have to ask yourself what you want to do with market movements (increase, decrease or maintain exposure) and pick the right tool. Of course, any strategy that maintains or increases exposure, will either have to accept a drawdown level at which you get liquidated, or lower initial leverage, or pays insurance against the declines, or limits its own upside to avoid full liquidation should the market drop enough. Pick your poison.
Yes, the long calls are expensive. ORATS says they cost about 20% per year. I think my plan is to buy them only if I am entering a trade when SQQQ is at an all time low. I might eventually figure out a cheaper hedge, such as weekly deep OTM calls or VIX hedges. It's going to be a long time before I deeply understand this strategy.

As for selling lower-strike puts, I am essentially doing that by selling the calls. A short call spread is equal to a long put spread. I just prefer the call spread because it gives me cash up front. I would consider selling additional puts if it made sense in terms of commissions. Right now, it doesn't but after the next reverse split, it could be viable. (Speaking of reverse splits -- that will make this strategy a bit messy. I've never dealt with options on a stock that reverse splits. Anyone have experience?)

I agree that it's no free lunch. That's why I am spending a lot of money on the long calls. My core belief is that this strategy is not fundamentally flawed in the same way that going long on 3x leverage ETFs is.

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

Post by Thereum » Sun Aug 02, 2020 6:08 pm

Semantics wrote:
Sat Aug 01, 2020 11:52 pm
Yeah, but your risk is the max loss of the credit spread (assuming you always fully fund your puts with the spread). In theory, in order to come close to matching the expected returns of -SQQQ you would need to open enough of these spreads to match the full equity allocation (55% if doing 55/45). And in that case, the risk is the entire equity part of the portfolio. That ought to still not match the returns of -SQQQ though, since the risk of the latter is unbounded.

It's particularly notable that the puts are so expensive that the short call in the spread needs to be significantly in-the-money to fund the put purchase. So if SQQQ declines, but only moderately, to a price between the current price and the short call strike price, you get less returns at expiry than the -SQQQ approach.

If it didn't work this way there would be a pretty clear arbitrage opportunity. Put another way, if your method is strictly better, why take any risk at all? Why not just go long your strategy and short the Hedgefundie strategy and reap the returns with absolutely zero risk.


You could also trade options on $NDX (or $SPX), which has 60/40 treatment, if you're not tied to QQQ in particular.
Shorting Hedgefundie's strategy and going long my strategy has produced positive returns, according to my backtests. Every single year has been a winner, although 2019 was only slightly a winner. This is probably because 2019 was a strongly trending market, which meant that long leveraged ETFs did well. Overall, shorting TQQQ does make a great hedge.

The more I think about this, the more I am having a hard time taking Hedgefundie's strategy seriously. It's a textbook case of recency bias and overfitting. His strategy will suffer from volatility decay in downward, sideways, or even mildly bullish markets. The large allocation to leveraged long term treasuries is also worrying, since rates are low. I actually think his portfolio will continue to do well over the next decade, but I can't invest money in a strategy that I know is theoretically flawed.

As for the index options you mentioned, I am not sure how they apply here. We are talking about unique properties of leveraged ETFs.

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

Post by RocketShipTech » Sun Aug 02, 2020 6:14 pm

Thereum wrote:
Sun Aug 02, 2020 6:08 pm
The more I think about this, the more I am having a hard time taking Hedgefundie's strategy seriously. It's a textbook case of recency bias and overfitting. His strategy will suffer from volatility decay in downward, sideways, or even mildly bullish markets. The large allocation to leveraged long term treasuries is also worrying, since rates are low. I actually think his portfolio will continue to do well over the next decade, but I can't invest money in a strategy that I know is theoretically flawed.
Flawed compared to what?

100% S&P? Clearly not. And that's the only benchmark HF set for himself.

Ranting about volatility decay in a strategy that returns 20%+ CAGR through decades of real world market conditions is like complaining about paying taxes after having won the lottery - yes you don't actually get to take home the full jackpot number, but who cares?

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

Post by ChrisBenn » Sun Aug 02, 2020 6:52 pm

Thereum wrote:
Sun Aug 02, 2020 6:08 pm
Semantics wrote:
Sat Aug 01, 2020 11:52 pm
Yeah, but your risk is the max loss of the credit spread (assuming you always fully fund your puts with the spread). In theory, in order to come close to matching the expected returns of -SQQQ you would need to open enough of these spreads to match the full equity allocation (55% if doing 55/45). And in that case, the risk is the entire equity part of the portfolio. That ought to still not match the returns of -SQQQ though, since the risk of the latter is unbounded.

It's particularly notable that the puts are so expensive that the short call in the spread needs to be significantly in-the-money to fund the put purchase. So if SQQQ declines, but only moderately, to a price between the current price and the short call strike price, you get less returns at expiry than the -SQQQ approach.

If it didn't work this way there would be a pretty clear arbitrage opportunity. Put another way, if your method is strictly better, why take any risk at all? Why not just go long your strategy and short the Hedgefundie strategy and reap the returns with absolutely zero risk.


You could also trade options on $NDX (or $SPX), which has 60/40 treatment, if you're not tied to QQQ in particular.
Shorting Hedgefundie's strategy and going long my strategy has produced positive returns, according to my backtests. Every single year has been a winner, although 2019 was only slightly a winner. This is probably because 2019 was a strongly trending market, which meant that long leveraged ETFs did well. Overall, shorting TQQQ does make a great hedge.

The more I think about this, the more I am having a hard time taking Hedgefundie's strategy seriously. It's a textbook case of recency bias and overfitting. His strategy will suffer from volatility decay in downward, sideways, or even mildly bullish markets. The large allocation to leveraged long term treasuries is also worrying, since rates are low. I actually think his portfolio will continue to do well over the next decade, but I can't invest money in a strategy that I know is theoretically flawed.

As for the index options you mentioned, I am not sure how they apply here. We are talking about unique properties of leveraged ETFs.
Re: shorting HF's premise portfolio
It seems like the logical conclusion of this thought exercise is just shorting both letf pairs (tqqq/sqqq or tmv/tmf), and leveraging up to desired volatility?

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

Post by firebirdparts » Sun Aug 02, 2020 7:49 pm

Thereum wrote:
Sat Aug 01, 2020 1:56 pm
Let me ask this: Is anyone beginning to see the flaws of going long on leveraged ETFs?
It’s a 5000 post thread and this is part 2. You better just say what you mean.
A fool and your money are soon partners

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

Post by Semantics » Sun Aug 02, 2020 9:46 pm

Thereum wrote:
Sun Aug 02, 2020 6:08 pm
Semantics wrote:
Sat Aug 01, 2020 11:52 pm
Yeah, but your risk is the max loss of the credit spread (assuming you always fully fund your puts with the spread). In theory, in order to come close to matching the expected returns of -SQQQ you would need to open enough of these spreads to match the full equity allocation (55% if doing 55/45). And in that case, the risk is the entire equity part of the portfolio. That ought to still not match the returns of -SQQQ though, since the risk of the latter is unbounded.

It's particularly notable that the puts are so expensive that the short call in the spread needs to be significantly in-the-money to fund the put purchase. So if SQQQ declines, but only moderately, to a price between the current price and the short call strike price, you get less returns at expiry than the -SQQQ approach.

If it didn't work this way there would be a pretty clear arbitrage opportunity. Put another way, if your method is strictly better, why take any risk at all? Why not just go long your strategy and short the Hedgefundie strategy and reap the returns with absolutely zero risk.


You could also trade options on $NDX (or $SPX), which has 60/40 treatment, if you're not tied to QQQ in particular.
Shorting Hedgefundie's strategy and going long my strategy has produced positive returns, according to my backtests. Every single year has been a winner, although 2019 was only slightly a winner. This is probably because 2019 was a strongly trending market, which meant that long leveraged ETFs did well. Overall, shorting TQQQ does make a great hedge.

The more I think about this, the more I am having a hard time taking Hedgefundie's strategy seriously. It's a textbook case of recency bias and overfitting. His strategy will suffer from volatility decay in downward, sideways, or even mildly bullish markets. The large allocation to leveraged long term treasuries is also worrying, since rates are low. I actually think his portfolio will continue to do well over the next decade, but I can't invest money in a strategy that I know is theoretically flawed.
The bond allocation is a legitimate concern, but you haven't explained at all how maintaining constant leverage is a flaw. All of your proposed alternatives have more risk. The version you are actually implementing is just massively inferior to the original due to taxes.
As for the index options you mentioned, I am not sure how they apply here. We are talking about unique properties of leveraged ETFs.
You can attain identical leverage using options or futures on the underlying index. It's been discussed many times in this thread, and it's vastly more tax-efficient than what you are doing. I'd suggest going back and reading the whole thread, you're just repeating a lot of questions and concerns that have been discussed before.

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

Post by HawkeyePierce » Mon Aug 03, 2020 12:53 am

I'm just about at the one year mark of diving into the EDV flavor of the Adventure. In that time, my allocation is up 49.57%.

(43/57 UPRO/EDV, quarterly rebals, entirely in Roth space)

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

Post by Steve Reading » Mon Aug 03, 2020 7:59 am

Thereum wrote:
Sun Aug 02, 2020 4:41 pm
Yes, the long calls are expensive. ORATS says they cost about 20% per year.
Yeah I figured. Like I said before, maintaining exposure on a down market is very difficult, let alone increasing it. If that's what you want, be prepared to pay heavily for the insurance.
Thereum wrote:
Sun Aug 02, 2020 4:41 pm
I agree that it's no free lunch. That's why I am spending a lot of money on the long calls. My core belief is that this strategy is not fundamentally flawed in the same way that going long on 3x leverage ETFs is.
I fail to see how you can claim "X strategy is fundamentally flawed" and then immediately say your own isn't a free lunch over it.

Let's get real: Do you think your strategy can produce higher returns, at lower risk (more efficient) than long LETFs? If yes, it's a free lunch! If not, then why are you claiming LETFs are "fundamentally flawed". They just have a different set of risk/returns that other strategies cannot dominate on both accounts.
"... 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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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty » Mon Aug 03, 2020 11:12 am

HawkeyePierce wrote:
Mon Aug 03, 2020 12:53 am
I'm just about at the one year mark of diving into the EDV flavor of the Adventure. In that time, my allocation is up 49.57%.

(43/57 UPRO/EDV, quarterly rebals, entirely in Roth space)
Started a year ago this month. 55/45 UPRO TMF. I’m up 46%.
"Discipline equals Freedom" - Jocko Willink

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