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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Uncorrelated
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Steve Reading wrote: Mon Aug 31, 2020 4:54 pm
Uncorrelated wrote: Mon Aug 31, 2020 3:15 pm
Steve Reading wrote: Mon Aug 31, 2020 9:53 am
Uncorrelated wrote: Mon Aug 31, 2020 1:52 am VIX is a measure of risk-neutral volatility (that means that it assumes options are priced by risk-neutral actors), but option traders are not risk neutral, this causes VIX to consistently under-estimate market volatility. Based on this explanation you might think that scaling VIX by some constant factor fixes this issue, but it turns out this doesn't work since the risk aversion of option traders changes quite substantially over time.
Gotcha. So you tried multiplying the VIX by some constant factor greater than 1.0 and used that as the future volatility estimate, and the results were inferior as well?
Exactly. I used a linear model (pred_vol = a + b * vix) to predict future volatility, and that results in worse out-of-sample utility. I also tried scaling the predicted volatility by various amounts, but a scaling factor of 1 gave the best results indicating that my linear model was already the best possible.
Ok but just to clarify, you only used b>1.0 above? And when you scaled pred_vol, was it by multiplying it by a number greater than 1.0?
I used a linear model the determine the best values for a and b, I don't know what the value(s) were exactly. I scaled pred_vol with values both above and below 1.
Investing Lawyer wrote: Mon Aug 31, 2020 10:30 pm If you want to predict volatility I would suggest using a GARCH model on sp500 returns. Personally, I've only seen GARCH modeling done on daily returns, but they've looked really good (haven't got around to it myself using longer dated sequences). Unfortunately with the typical GARCH(1,1) model you only get a prediction one period ahead. A linear model of VIX to predict the future volatility is not going to work. Least squares estimates are likely not consistent due to the absurd autocorrelation of the VIX and therefore, the residuals as well. If I wanted to model the VIX itself, I would consider only using an ARIMA model. I imagine if you run a least squares with the past value to predict the future and an ARIMA(1,0,1) you would get different estimates of the coefficients for the parameter for the lagged value. (Vix would likely need to be differenced before modeling so both models would be bad)
Linear model is a bit of a misnomer, the way I have implemented it has more similarities to quantile regression. My linear model significant outperforms various GARCH models terms of R^2 and out-of-sample performance (various time horizons. I'm not very knowledgeable about GARCH models but I tried multiple different models from a python package). I also tried using GARCH as an input to other models, but that didn't work either. I repeated the same process with various machine learning algorithms, none of them outperformed my simple linear model. I suppose the only thing I haven't tried yet are RNN's.

To summarize, I think I did my research pretty well
tomphilly
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Uncorrelated, you mentioned that it would be dumb for a target volatility strategy to go to the extreme opposite ratio during a highly volatile period, where it would be signaling to allocate 20/80 UPRO/TMF or greater. I thought so too based on a very brief look of monthly returns in PV. I decided to look more closely and compare the months between 2010 and 2020 with HFEA where the TV strategy signaled for TMF to exceed 45%. Overall it didn't have much of an impact one way or the other. It is probably still beneficial to cap TMF at 45%, though, at least based off a 10 year backtest (for CAGR). Can you comment on why going to the extreme reverse ratio is a bad idea?

I made a very rudimentary, nonacademic illustration where I compared the highly volatile month performances of 80/20 UPRO/TMF @ 25% volatility to 55/45 HFEA. These volatile months where the TV model signaled >45% TMF are highlighted in blue. Note that in every instance where TV is signaling >45% TMF it is only for a single month, allowing for a comparison to that month's return using HFEA, or so I assume.

https://i.imgur.com/0jvmgnV.png
RovenSkyfall
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

I hope everyone will forgive me for not reading through all of the post over the couple of different threads, but I have some quick nuts and bolts questions to ask (which hopefully havent already been addressed).

1) Where did HEDGEFUNDIE go?
2) I get an error message with Vanguard saying I cant buy leveraged funds in my brokerage account. Is the HFEA not possible within Vanguard?
3) It sounds like a lot of people have their accounts over at M1 so they can auto-rebalance (assuming that you cant do that at vanguard?). How is M1 for Roth IRAs and backdoor Roth IRA conversions?

Thank you all in advance for your time.
TNWoods
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

RovenSkyfall wrote: Tue Sep 01, 2020 3:39 pm I hope everyone will forgive me for not reading through all of the post over the couple of different threads, but I have some quick nuts and bolts questions to ask (which hopefully havent already been addressed).

1) Where did HEDGEFUNDIE go?
2) I get an error message with Vanguard saying I cant buy leveraged funds in my brokerage account. Is the HFEA not possible within Vanguard?
3) It sounds like a lot of people have their accounts over at M1 so they can auto-rebalance (assuming that you cant do that at vanguard?). How is M1 for Roth IRAs and backdoor Roth IRA conversions?

Thank you all in advance for your time.
Some other poster was unceasing in his insulting and condescending comments, and Hedgefundie finally had enough and left.

I have my Roth at M1 and am very pleased with their website and service.

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

tomphilly wrote: Tue Sep 01, 2020 1:32 pm Can you comment on why going to the extreme reverse ratio is a bad idea?
My view is that one should always have an asset allocation that is mean-variance optimal and investors should have some consistent risk preferences.

Suppose that under normal conditions 60/40 is mv optimal. Here is an image of my mean-variance optimizer showing that that ratio is indeed optimal among a large part of the efficient frontier. Specifically, we can observe that investors with an RRA (γ) of 5, 3, 2 hold the exact same ratio between UPRO and TMF (plus some cash). Investors with γ = 1 still have an asset allocation that is similar.

Now suppose that you run a volatility managed strategy and COVID-19 hit the news, you estimate future stock volatility to increase 3-fold and bond volatility to stay unchanged. The image now changes to:

Pay close attention to the location of the "X" symbols on the top pane, they shifted to the left. We can observe on the bottom pane that investors should significantly increase their cash exposure. If we pay close attention to the utility curve of γ = 2, we can observe that the expected utility of investors that changed 60/40 to 20/80 without adding additional cash now has negative expected utility. That is, they have chosen an asset allocation that is worse than 100% cash.

We can also view this in a different way that doesn't rely on complicated mathematics. Suppose we have an investor which targets a volatility of 30%. In the first image (top pane), it is visible that this results in an expected return of 12%. In the second image (top pane), it is visible that this investor receives an expected return of around 5.5%. But if the investor had targeted a volatility of 40% in the first period and a volatility of 20% in the second period, this would have resulted in higher expected return for similar risk (averaged over both periods).

(Of course, holding both cash and UPRO is a bad idea, it's cheaper to hold unleveraged ETF's. But that's not the point here. The point is that if an investor has self-consistent risk preferences, the investor should take less risk overall if investment opportunities become less attractive).
occambogle
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Started the adventure this year in a very small play-money Roth IRA and made a few changes along the way...
- Started in mid-April 2020 with 55/45 UPRO/TMF
- Switched in mid-May to 27.5/27.5/45 UPRO/TQQQ/TMF
- I was due for a quarterly rebalancing in July so I took the opportunity to switch to 52/48 TQQQ/TMF
Currently the account is sitting at 62/38 TQQQ/TMF and is up 50% since starting just under 5 months ago. Will hold out on rebalancing until it's due in mid-October.... needless to say I'm pretty happy and about time for me to say thanks to all on this thread....
dziuniek
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

occambogle wrote: Wed Sep 02, 2020 6:34 am Started the adventure this year in a very small play-money Roth IRA and made a few changes along the way...
- Started in mid-April 2020 with 55/45 UPRO/TMF
- Switched in mid-May to 27.5/27.5/45 UPRO/TQQQ/TMF
- I was due for a quarterly rebalancing in July so I took the opportunity to switch to 52/48 TQQQ/TMF
Currently the account is sitting at 62/38 TQQQ/TMF and is up 50% since starting just under 5 months ago. Will hold out on rebalancing until it's due in mid-October.... needless to say I'm pretty happy and about time for me to say thanks to all on this thread....
Nicely done. I've been tiptoeing in myself with a tiny bit. Just the play money. (for now)
occambogle
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

dziuniek wrote: Wed Sep 02, 2020 9:23 am Nicely done. I've been tiptoeing in myself with a tiny bit. Just the play money. (for now)
It's less than 1% of my portfolio, because that's the size of my Roth which I only started having this year. Have looked into trying it in taxable but the rebalancing and tax issues have put me off so far... although I know a number of other people on this thread have done this.
tomphilly
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Uncorrelated wrote: Tue Sep 01, 2020 4:07 pm
tomphilly wrote: Tue Sep 01, 2020 1:32 pm Can you comment on why going to the extreme reverse ratio is a bad idea?
My view is that one should always have an asset allocation that is mean-variance optimal and investors should have some consistent risk preferences.

[...]

(Of course, holding both cash and UPRO is a bad idea, it's cheaper to hold unleveraged ETF's. But that's not the point here. The point is that if an investor has self-consistent risk preferences, the investor should take less risk overall if investment opportunities become less attractive).
Thank you for that explanation. I tried my best to understand it. These are my practical takeaways - if I understand correctly. Firstly, if you already have a high risk tolerance by embarking on a crazy strategy like 80/20 at 25% target volatility, allocating in excess of HFEA's chosen 45% TMF based on a TV signal is going against your own risk profile. Secondly, when TV is signalling to allocate in excess of 45% TMF, either don't exceed 45% or allocate the difference to cash, or better still, allocate it to unleveraged SPY, which is more appropriate for your risk profile.
chrisdds98
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Hey, I've got a question for those of you who use TYD. Why is it slightly down today when IEF (int treasuries) and UST (2x int) both up?
cos
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Contact:

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

chrisdds98 wrote: Wed Sep 02, 2020 12:55 pm Hey, I've got a question for those of you who use TYD. Why is it slightly down today when IEF (int treasuries) and UST (2x int) both up?
Looking at the intraday prices of leveraged ETFs is close to futile. They tend to experience a load of tracking error in both directions. This is a long-term strategy, but if you absolutely must peek, you should wait for closing prices.
Impatience
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

chrisdds98 wrote: Wed Sep 02, 2020 12:55 pm Hey, I've got a question for those of you who use TYD. Why is it slightly down today when IEF (int treasuries) and UST (2x int) both up?
Just a guess here but TYD trades at a very low volume. Its price may be slow to reflect changes in the value of the underlying securities and distorted by the size of the bid/ask.
Mickelous
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

occambogle wrote: Wed Sep 02, 2020 6:34 am Started the adventure this year in a very small play-money Roth IRA and made a few changes along the way...
- Started in mid-April 2020 with 55/45 UPRO/TMF
- Switched in mid-May to 27.5/27.5/45 UPRO/TQQQ/TMF
- I was due for a quarterly rebalancing in July so I took the opportunity to switch to 52/48 TQQQ/TMF
Currently the account is sitting at 62/38 TQQQ/TMF and is up 50% since starting just under 5 months ago. Will hold out on rebalancing until it's due in mid-October.... needless to say I'm pretty happy and about time for me to say thanks to all on this thread....
I'm in the same boat as you with the start, around the middle of april, and over the course of the next month or two I allocated the entirety of what I was allowed to of my portfolio into the adventure. Fidelity made me keep a small % (5% or so) invested in at least an index fund and the remainder I was allowed to go with brokeragelink plus all new contributions as well. Started with UPRO and TMF, switched to all weather leveraged, then changed my mind and for the past couple months have been running UPRO/TQQQ/TMF 30/25/45. Currently up over 40% YTD. I'm a firm believe in this strategy to attain FIRE and I would have not invested this much \$ (20% of my paycheck, 9% employer match) as well as maxing out last years roth and working on this one if I had a strategy that I believed would yield what the average investor is able to achieve.
Nicolas Perrault
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Thereum wrote: Tue Aug 25, 2020 3:46 pm
Nicolas Perrault wrote: Mon Aug 24, 2020 10:01 pm Yea they be called bonds, haven't you been paying attention?

I don't know of something that VXX can do that bonds can't do better. It's similar for your risk and far better for your returns to have 15% long bonds than 4% VXX. Just run an efficient frontier simulation in portfoliovisualizer. The long bond/SP500 portfolio dominates the VIX/SP500 portfolio (you can use VIXY instead of VXX). There's no risk-return combination for which the VIX/SP500 is more efficient than the long bond/SP500.

In plain English, there are far cheaper ways of paying that fee to reduce your max drawdown than going for short-term VIX futures.
Volatility might be a better hedge than long term treasuries with interest rates so low.
The lower the interest rates, the longer the duration of long bonds, and the more potent they will be at hedging equity, assuming correlations do not change. (It's just math.) This phenomenon is known as bond convexity.
Thereum wrote: Tue Aug 25, 2020 3:46 pm When I backtest 75/25 vs. 75/20/5, I get better risk-adjusted returns and much lower drawdowns for the latter.
When I backtest 68 UPRO/32 TMF I get better returns with similar standard deviation and max drawdowns as 75/20/5. Whatever that means going forward. But like gold, I feel short-term volatility futures are a solution in search of a problem. I'll pass.
Nicolas Perrault
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

occambogle wrote: Wed Sep 02, 2020 6:34 am Started the adventure this year in a very small play-money Roth IRA and made a few changes along the way...
- Started in mid-April 2020 with 55/45 UPRO/TMF
- Switched in mid-May to 27.5/27.5/45 UPRO/TQQQ/TMF
- I was due for a quarterly rebalancing in July so I took the opportunity to switch to 52/48 TQQQ/TMF
Currently the account is sitting at 62/38 TQQQ/TMF and is up 50% since starting just under 5 months ago. Will hold out on rebalancing until it's due in mid-October.... needless to say I'm pretty happy and about time for me to say thanks to all on this thread....
Reasoning for TQQQ?

QQQ is 35% in 3 stocks and 52% in 6 stocks. That's getting close to gambling.

(S&P500: 17% in 3 stocks, 22.5% in 6 stocks).
Thereum
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Nicolas Perrault wrote: Wed Sep 02, 2020 9:29 pm

The lower the interest rates, the longer the duration of long bonds, and the more potent they will be at hedging equity, assuming correlations do not change. (It's just math.) This phenomenon is known as bond convexity.
I get that, but how do we know that rates will drop during the next stock market crash? I think it's less likely that investors will rush into treasuries during a crash when rates are near zero -- they might want cash instead. We even saw treasuries sell off during the March crash until the Fed stepped in.

I am long EDV on margin and have some puts on TMF as a hedge. I wouldn't be surprised if TMF is down in a few years while EDV is flat or up. We are probably going to see a lot of volatility in long term treasuries with rates so low, which will hurt the 3x funds.
occambogle
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Nicolas Perrault wrote: Wed Sep 02, 2020 9:40 pm Reasoning for TQQQ?
QQQ is 35% in 3 stocks and 52% in 6 stocks. That's getting close to gambling.
(S&P500: 17% in 3 stocks, 22.5% in 6 stocks).
I do share your concern about concentration in QQQ, and mentioned it myself in another thread about ARK Funds and QQQ. So what was my reasoning for TQQQ? As mentioned I did start out with UPRO only, then moved to UPRO/TQQQ, then to TQQQ only.

Anecdotally.... watching the movements every day this year when I was UPRO and then UPRO/TQQQ I noticed many days with UPRO down and TQQQ up, or with both up but TQQQ more, and on the down days TQQQ down less than UPRO. My thoughts were that while TQQQ theoretically has greater volatility than UPRO and is less diversified, the particular nature of this coronavirus crisis was positioning Tech stocks in a kind of defensive way, being less affected by the restrictions that were killing stocks that were dependent on in-person activities, and UPRO had more of those kind of more vulnerable stocks. That's not very scientific, I'm aware.

Semi-rationally.... I spent some time looking at PortfolioVisualizer. While importantly noting that it does only monthly figures, so isn't necessarily showing daily spikes up/down, TQQQ just backtested better with higher Sharpe and Sortino ratios both this year and previous years. I was also concerned about a second crash and potential drawdowns, that the March one might just be a prelude to another drop... and given TQQQ actually fared better than UPRO in the March crash, with a lower drawdown, I felt it was a better choice... at least for now.

UPRO/TQQQ/TMF Portfolio Optimization looking at Efficient Frontier tab - TQQQ has higher return and higher Sharpe ratio.

UPRO/TMF vs UPRO/TQQQ/TMF vs TQQQ/TMF Year to date - shows better Sharpe and Sortino ratios for TQQQ

UPRO/TMF vs UPRO/TQQQ/TMF vs TQQQ/TMF from 2010 to date - shows better Sharpe and Sortino ratios for TQQQ

Is this anecdotal thinking and backtesting flawed? Quite probably, I really have no expertise and just started investing this year. Is there an element of recency bias following Tech's outperformance this last decade and this year? Probably. Will I stay with this combination? Maybe, maybe not. Fundamentally, this is indeed a gamble for me... but represents only 1% of portfolio. I only started with Roth IRAs this year so the amounts I can put into them are very small and I can afford to lose it all. But given that's the case... I want to aim for the chance of maximum possible long-term return even if that carries some higher risk.
Semantics
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Nicolas Perrault wrote: Wed Sep 02, 2020 9:29 pm
Thereum wrote: Tue Aug 25, 2020 3:46 pm
Nicolas Perrault wrote: Mon Aug 24, 2020 10:01 pm Yea they be called bonds, haven't you been paying attention?

I don't know of something that VXX can do that bonds can't do better. It's similar for your risk and far better for your returns to have 15% long bonds than 4% VXX. Just run an efficient frontier simulation in portfoliovisualizer. The long bond/SP500 portfolio dominates the VIX/SP500 portfolio (you can use VIXY instead of VXX). There's no risk-return combination for which the VIX/SP500 is more efficient than the long bond/SP500.

In plain English, there are far cheaper ways of paying that fee to reduce your max drawdown than going for short-term VIX futures.
Volatility might be a better hedge than long term treasuries with interest rates so low.
The lower the interest rates, the longer the duration of long bonds, and the more potent they will be at hedging equity, assuming correlations do not change. (It's just math.) This phenomenon is known as bond convexity.
Doesn't the convexity argument only apply when the Fed actually lowers interest rates? (Presumably equities also benefit from convexity in the same way.)

My understanding is that if the Fed rate isn't changing, then treasury prices/yields would be driven purely by the open market (though that does include QE). There would be no benefit from convexity in that case, it's just about how high investors bid up bonds when moving their money out of equities. In fact, with yields being as low as they are now, I might argue that treasuries have become a worse hedge, because a) it's hard for the Fed to lower rates further, and b) investors may start to prefer other asset classes like cash and gold to treasuries. I still think they may be the best hedge we have though though, because there's still QE, and there's still the possibility of rates going negative. Edit: Thereum basically said the same thing, sorry for being repetitive.

My assumption is the reason treasuries and equities were positively correlated from 82-00 is because yields were high enough that many investors saw them as first class assets, not merely a safe haven in turbulent markets.
Last edited by Semantics on Thu Sep 03, 2020 1:26 am, edited 2 times in total.
Semantics
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Nicolas Perrault wrote: Wed Sep 02, 2020 9:40 pm
occambogle wrote: Wed Sep 02, 2020 6:34 am Started the adventure this year in a very small play-money Roth IRA and made a few changes along the way...
- Started in mid-April 2020 with 55/45 UPRO/TMF
- Switched in mid-May to 27.5/27.5/45 UPRO/TQQQ/TMF
- I was due for a quarterly rebalancing in July so I took the opportunity to switch to 52/48 TQQQ/TMF
Currently the account is sitting at 62/38 TQQQ/TMF and is up 50% since starting just under 5 months ago. Will hold out on rebalancing until it's due in mid-October.... needless to say I'm pretty happy and about time for me to say thanks to all on this thread....
Reasoning for TQQQ?

QQQ is 35% in 3 stocks and 52% in 6 stocks. That's getting close to gambling.

(S&P500: 17% in 3 stocks, 22.5% in 6 stocks).
The way I look at this, it might make not make sense to think about the stock of a mega-cap company with multiple billion dollar businesses as "one stock" in the same way we do smaller companies.

I feel at least as comfortable investing \$1000 in a \$1T company with five major products as I do investing \$200 each in five \$200B companies with one major product.

To be sure, the concentration amplifies some risks, like management and antitrust risks. But it also diminishes other risks.

I think there might be a compelling argument in favor of S&P 500 over QQQ that focuses on sector concentration, i.e. being overweight on tech and underweight in sectors like finance, oil & gas, utilities, which lowers diversity and might add enough volatility to hurts returns. I don't think the problem is with the company sizes (if that's a concern, we should consider adding TNA to capture small cap better).
statefan03
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
occambogle
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

statefan03 wrote: Thu Sep 03, 2020 1:43 pm No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
A bit of a brutal day especially for the TQQQ folks like me. And TMF is up only 1.5% currently, which doesn't compensate much.
That said I'm still up 39% since mid-April, so I have to put it in a bit of perspective.
I just hope we get a bit of a rebound tomorrow and this isn't the start of something deeper.
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

statefan03 wrote: Thu Sep 03, 2020 1:43 pm No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
Don't have TQQQ. Have UPRO.
chrisdds98
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

statefan03 wrote: Thu Sep 03, 2020 1:43 pm No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
shoulda rebalanced yesterday!
Meaty
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

It’s a long term strategy. March was rough too but this investment shouldn’t be viewed in 1 day increments anyway
"Discipline equals Freedom" - Jocko Willink
runeberg
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Meaty wrote: Thu Sep 03, 2020 2:28 pm It’s a long term strategy. March was rough too but this investment shouldn’t be viewed in 1 day increments anyway
I've set myself a target of reviewing in 2 years how this strategy has worked out.
I sometimes peek at the watch list and of course when doing the quarterly re-balancing. I'm trying to decrease the former habit.

Of course now that this happened (and worse may yet come) I'm happy that I'm not in TQQQ but in UPRO.
langlands
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

I personally think an adjustment should be made today for UPRO/TQQQ allocation (i.e. decrease it). VIX is up 30% today. Anyway, just my opinion.
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Uncorrelated wrote: Tue Sep 01, 2020 4:07 pm
tomphilly wrote: Tue Sep 01, 2020 1:32 pm Can you comment on why going to the extreme reverse ratio is a bad idea?
My view is that one should always have an asset allocation that is mean-variance optimal and investors should have some consistent risk preferences.

Suppose that under normal conditions 60/40 is mv optimal. Here is an image of my mean-variance optimizer showing that that ratio is indeed optimal among a large part of the efficient frontier. Specifically, we can observe that investors with an RRA (γ) of 5, 3, 2 hold the exact same ratio between UPRO and TMF (plus some cash). Investors with γ = 1 still have an asset allocation that is similar.

Now suppose that you run a volatility managed strategy and COVID-19 hit the news, you estimate future stock volatility to increase 3-fold and bond volatility to stay unchanged. The image now changes to:

Pay close attention to the location of the "X" symbols on the top pane, they shifted to the left. We can observe on the bottom pane that investors should significantly increase their cash exposure. If we pay close attention to the utility curve of γ = 2, we can observe that the expected utility of investors that changed 60/40 to 20/80 without adding additional cash now has negative expected utility. That is, they have chosen an asset allocation that is worse than 100% cash.

We can also view this in a different way that doesn't rely on complicated mathematics. Suppose we have an investor which targets a volatility of 30%. In the first image (top pane), it is visible that this results in an expected return of 12%. In the second image (top pane), it is visible that this investor receives an expected return of around 5.5%. But if the investor had targeted a volatility of 40% in the first period and a volatility of 20% in the second period, this would have resulted in higher expected return for similar risk (averaged over both periods).

(Of course, holding both cash and UPRO is a bad idea, it's cheaper to hold unleveraged ETF's. But that's not the point here. The point is that if an investor has self-consistent risk preferences, the investor should take less risk overall if investment opportunities become less attractive).
I really appreciate your posts, but I'm struggling to understand.
Although I followed through with the TV strategy until now, I've mentioned earlier that it feels counter intuitive to sell into losses for rebalancing.
(Compared to a "normal" rebalancing, where you sell high and buy low.)

What I think to understand from you is to go for a fixed allocation according to one's risk aversion.
I'm able to take risks, but a 100% UPRO allocation isn't working very well, as has been discussed in this thread (no recovery from huge drawdowns possible).
So, how do I determine a "risky" but "working" allocation which fits my risk appetite? 45/55, 60/40, 80/20?
effigy98
Posts: 73
Joined: Wed Sep 25, 2019 8:57 pm

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

Small allocation to VXX buffered the carnage today.
Ciel
Posts: 122
Joined: Thu Jun 27, 2013 11:14 pm

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

I bailed on the HFEA Tuesday. Wednesday's performance stung a little bit but today affirmed my decision that I just don't have the stomach for this (specifically a leveraged downturn in stocks with limited ability of Treasuries to protect). I realize it's a long term strategy with wild expected volatility. My doubts about its long term performance with interest rates this low are just too great, though it seems that there are plausible scenarios in which HFEA can outperform even with rising rates.
Semantics
Posts: 184
Joined: Tue Mar 10, 2020 1:42 pm

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

Usually I have a drink after looking at my portfolio at the end of the day. Tonight I'll be having a drink before looking at my portfolio.
tomphilly
Posts: 73
Joined: Wed Aug 05, 2020 11:29 am

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

Ouchies. TMF was pretty useless today. The thing is though, the drop wasn't based on any shocking or ominous news, just "jitters about high valuations". To me that smelt like a buy-the-dip scenario.
Last edited by tomphilly on Thu Sep 03, 2020 4:15 pm, edited 1 time in total.
7th_Diagram
Posts: 52
Joined: Fri Jan 25, 2019 11:37 pm

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

Do not be afraid, stay the course.
"You have to understand, most people are not ready to be unplugged,and many of them are so injured, so hopelessly dependent upon the system, that they will fight to protect it." | ~Morpheus
rchmx1
Posts: 147
Joined: Sat Oct 26, 2019 6:38 pm

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

I've only been in the market since last Nov, so there are a lot of things I'm experiencing for the first time. In particular, I get the impression (not saying how well founded it is) that sharp run ups seem to be quickly followed by steep drops, as if it's a case of profit taking and then buying the dips. On the other hand, I wonder how much impact individual investors engaged in this type of market timing can have on prices. For people that have been in the market much longer, and particularly through periods of high volatility, does this type of "buying the dip" behavior seem to be just part of periods of high volatility?
langlands
Posts: 752
Joined: Wed Apr 03, 2019 10:05 pm

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

tomphilly wrote: Thu Sep 03, 2020 4:13 pm Ouchies. TMF was pretty useless today. The thing is though, the drop wasn't based on any shocking or ominous news, just "jitters about high valuations". To me that smelt like a buy-the-dip scenario.
I understand the logic behind your thinking, but I would personably be more disturbed by a large drop for no reason, especially in the current environment. I'll just lay out my anti-boglehead opinion plainly: the probability we are currently in a bubble is much higher than average and bubbles move massively on sentiment by definition. A drop for an understandable reason is more likely to be a one off. If there's no rationale behind a drop, then what's stopping it from dropping 5% again tomorrow? Anyway, as I said, just my opinion (which I distinguish from other statements I make which I intend to be fact )

To counter my own point, there was another such drop just like today for seemingly no reason (perhaps attributed slightly to civil unrest) back in June I believe, which was a one off. Vix spiked up to 40 and then slowly dropped back into the 20's.
Mickelous
Posts: 172
Joined: Mon Apr 20, 2020 11:24 pm

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

statefan03 wrote: Thu Sep 03, 2020 1:43 pm No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
Basically just went back in time 3 days on my portfolio after the prior two days before today, which is still good.
Mickelous
Posts: 172
Joined: Mon Apr 20, 2020 11:24 pm

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

Does anyone have that volatility to return chart showing the rate of return needed based on the yearly volatility in order for this to succeed?
willthrill81
Posts: 22699
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

statefan03 wrote: Thu Sep 03, 2020 1:43 pm No activity on this thread today? TQQQ is down %15. Curious how all you guys are doing today.
I'm glad I rebalanced yesterday.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Semantics
Posts: 184
Joined: Tue Mar 10, 2020 1:42 pm

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

langlands wrote: Thu Sep 03, 2020 4:48 pm
tomphilly wrote: Thu Sep 03, 2020 4:13 pm Ouchies. TMF was pretty useless today. The thing is though, the drop wasn't based on any shocking or ominous news, just "jitters about high valuations". To me that smelt like a buy-the-dip scenario.
I understand the logic behind your thinking, but I would personably be more disturbed by a large drop for no reason, especially in the current environment. I'll just lay out my anti-boglehead opinion plainly: the probability we are currently in a bubble is much higher than average and bubbles move massively on sentiment by definition. A drop for an understandable reason is more likely to be a one off. If there's no rationale behind a drop, then what's stopping it from dropping 5% again tomorrow? Anyway, as I said, just my opinion (which I distinguish from other statements I make which I intend to be fact )

To counter my own point, there was another such drop just like today for seemingly no reason (perhaps attributed slightly to civil unrest) back in June I believe, which was a one off. Vix spiked up to 40 and then slowly dropped back into the 20's.
The negative correlation between long-term treasuries and stocks has kind of disappeared the past month and a half - they have been positively correlated. That of course happens from time to time over small sample sizes, but does make it seem like today's drop wasn't just people moving money from one asset class to another (it is not a zero-sum game), but rather a reality check on valuations.
tomphilly
Posts: 73
Joined: Wed Aug 05, 2020 11:29 am

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

I'm waiting on Portfolio Visualizer to update the forward volatility signal - it's still signaling the volatility from yesterday of around 12%... I guess I'll find out tomorrow whether I need to re-balance or not.

There was really no place to hide today -- gold down, BTAL down, and TMF or TYD were hardly hedges.
langlands wrote: Thu Sep 03, 2020 4:48 pm If there's no rationale behind a drop, then what's stopping it from dropping 5% again tomorrow?
True, if a bubble expands on positive sentiment alone (and not news and fundamentals) then the reverse can also be true - it can continue to contract without justification. Well, after hours are not looking great so we may be in for more carnage tomorrow.
Semantics wrote: Thu Sep 03, 2020 6:57 pm ... but does make it seem like today's drop wasn't just people moving money from one asset class to another
Bloomberg initially pitched it as a "rotation out of tech" - it was clearly more than this, it was a rotation out of equities entirely
occambogle
Posts: 613
Joined: Thu Dec 12, 2019 4:58 am

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

tomphilly wrote: Thu Sep 03, 2020 7:09 pm There was really no place to hide today -- gold down, BTAL down, and TMF or TYD were hardly hedges.
About the only thing that was really up was VIX... VXX and VIXY both up about 13%. Congrats to those that had some. But hard to hold enough of that to really compensate....
tomphilly wrote: Thu Sep 03, 2020 7:09 pm Bloomberg initially pitched it as a "rotation out of tech" - it was clearly more than this, it was a rotation out of equities entirely
Where to though? I mean beyond the very short-term future... In the current low-rate environment I'm finding it hard to see where all that money is going to go....
danyboy7
Posts: 198
Joined: Tue Jul 14, 2020 11:35 am

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

So,a big resumèè
The target 25% volatility strategy for UPRO+TMF combo seems to be the best Hedgeundie version right ? Do I have to get the PV pro version to see the signals change allocation,right ?
Is there anyone that is performing HF strategies through options ? I'm using Interactive brokers and I would need some help in order to set it....this all mess because I'm not allowed to buy American Etfs without KIDs
Thanks in advice for the attention
I have seen the light
RovenSkyfall
Posts: 117
Joined: Wed Apr 01, 2020 11:40 am

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

M1 seems to only have SIPC insurance up to \$500K.

Is anyone doing this through a Roth IRA with Fidelity? If so, are there any fees for housing it under Fidelity? Their Agreement and Disclosures are surprisingly unclear about fees. Also, is the HFEA available? I opened a Vanguard Roth IRA to invest in the HFEA but they dont allow leveraged etfs, so that was a bit of a bust. Just looking for the best place to open an account for the HFE in a Roth IRA. Thank you for your time.
Jags4186
Posts: 5367
Joined: Wed Jun 18, 2014 7:12 pm

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

Yesterday really wasn't that bad. 55/45 UPRO/TMF returned -5.28% (I had rebalanced on 9/1 so I was almost right there).

In contrast:
SP500: -3.51%
NASDAQ: -4.96%

That isn't that far off of regular equities when you consider that the portfolio is up around 50% for the year.
perfectuncertainty
Posts: 192
Joined: Sun Feb 04, 2018 7:44 pm

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

danyboy7 wrote: Fri Sep 04, 2020 5:07 am So,a big resumèè
The target 25% volatility strategy for UPRO+TMF combo seems to be the best Hedgeundie version right ? Do I have to get the PV pro version to see the signals change allocation,right ?
Is there anyone that is performing HF strategies through options ? I'm using Interactive brokers and I would need some help in order to set it....this all mess because I'm not allowed to buy American Etfs without KIDs
Thanks in advice for the attention
Yes - it's a paid subscription.

A 25% TV with a UPRO/TMF 55/45 split is as follows:

42.09% UPRO
34.43% TMF
23.48% Cash
vijaym73
Posts: 35
Joined: Fri Sep 08, 2017 11:34 am

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

Yesterday lost 11.83%

Currently am TQQQ/TMF in 70/30 ratio

Next rebalance is October 1st
Meaty
Posts: 814
Joined: Mon Jul 22, 2013 7:35 pm
Location: Florida

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

vijaym73 wrote: Fri Sep 04, 2020 7:29 am Yesterday lost 11.83%

Currently am TQQQ/TMF in 70/30 ratio

Next rebalance is October 1st
I was down 6% yesterday but am up 70% this year. I can’t complain
"Discipline equals Freedom" - Jocko Willink
tomphilly
Posts: 73
Joined: Wed Aug 05, 2020 11:29 am

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

danyboy7 wrote: Fri Sep 04, 2020 5:07 am The target 25% volatility strategy for UPRO+TMF combo seems to be the best Hedgeundie version right ? Do I have to get the PV pro version to see the signals change allocation,right ?
It's not necessarily better - it has much higher drawdowns and lower Sharpe than classic HFEA - at 80/20 35% volatility it has a superior CAGR, at least based on 10 year backtests and a few important toggle settings. It also hasn't been backtested beyond 2010, unlike HFEA which was modeled back to the 1930's by HedgeFundie. I would love if a smart math/finance person on here modeled it during the periods where HFEA under-performed (60's-80's). My motivation to move to it was not based on higher CAGR, but its reduced reliance on treasuries. You need the PV subscription to see the forward signal, though there may be ways to calculate it manually.
danyboy7 wrote: Fri Sep 04, 2020 5:07 am Is there anyone that is performing HF strategies through options ?
I do a small allocation of RSP calls (equal weight SPY), my overall default allocation is 10/70/20 RSP/UPRO/TMF. My gambit is RSP will begin to outperform SPY in the near term. The spread on calls is large, so it's not ideal, so I've kept the experiment small - if there was a 3xRSP I'd use that instead.

This morning the PV volatility signal is calling for 33% TMF, so I have re-balanced... reluctantly - TMF is dumping again.
danyboy7
Posts: 198
Joined: Tue Jul 14, 2020 11:35 am

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

perfectuncertainty wrote: Fri Sep 04, 2020 7:27 am
danyboy7 wrote: Fri Sep 04, 2020 5:07 am So,a big resumèè
The target 25% volatility strategy for UPRO+TMF combo seems to be the best Hedgeundie version right ? Do I have to get the PV pro version to see the signals change allocation,right ?
Is there anyone that is performing HF strategies through options ? I'm using Interactive brokers and I would need some help in order to set it....this all mess because I'm not allowed to buy American Etfs without KIDs
Thanks in advice for the attention
Yes - it's a paid subscription.

A 25% TV with a UPRO/TMF 55/45 split is as follows:

42.09% UPRO
34.43% TMF
23.48% Cash
Thanks a lot,so I guess anyone willing to follow this strategy would have to pay the pro-subscription.....how much is it ?
I have seen the light
danyboy7
Posts: 198
Joined: Tue Jul 14, 2020 11:35 am

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

tomphilly wrote: Fri Sep 04, 2020 8:38 am
danyboy7 wrote: Fri Sep 04, 2020 5:07 am The target 25% volatility strategy for UPRO+TMF combo seems to be the best Hedgeundie version right ? Do I have to get the PV pro version to see the signals change allocation,right ?
It's not necessarily better - it has much higher drawdowns and lower Sharpe than classic HFEA - at 80/20 35% volatility it has a superior CAGR, at least based on 10 year backtests and a few important toggle settings. It also hasn't been backtested beyond 2010, unlike HFEA which was modeled back to the 1930's by HedgeFundie. I would love if a smart math/finance person on here modeled it during the periods where HFEA under-performed (60's-80's). My motivation to move to it was not based on higher CAGR, but its reduced reliance on treasuries. You need the PV subscription to see the forward signal, though there may be ways to calculate it manually.
danyboy7 wrote: Fri Sep 04, 2020 5:07 am Is there anyone that is performing HF strategies through options ?
I do a small allocation of RSP calls (equal weight SPY), my overall default allocation is 10/70/20 RSP/UPRO/TMF. My gambit is RSP will begin to outperform SPY in the near term. The spread on calls is large, so it's not ideal, so I've kept the experiment small - if there was a 3xRSP I'd use that instead.

This morning the PV volatility signal is calling for 33% TMF, so I have re-balanced... reluctantly - TMF is dumping again.
Thanks a lot,yes a 10 year backtest is no enough imho,we need to go much further back
I have seen the light
Stef
Posts: 1190
Joined: Thu Oct 10, 2019 10:13 am

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

Is TQQQ/TMF really a good idea?