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

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

MotoTrojan wrote: Sat Oct 12, 2019 12:11 pm It is all about the ratio of volatility of equity to volatility of treasuries. TMF moves more than EDV. The best way to think about it is that 55/45 UPRO/TMF and 43/57 UPRO/EDV are the same portfolio (same ratio of volatility over the long run) but the 55/45 UPRO/TMF one has ~28% more leverage overall. More leverage does not always mean more return, and it does always mean more risk.

1st I got the long-term volatility of simulated UPRO, TMF, and EDV from 1955-2018 using the Simba spreadsheet. You could do the same using Portfolio Visualizer but I don't have simulated EDV data back since VEDTX inception.

Then I took (volatility_UPRO * 0.55) / (volatility_TMF * 0.45) and set that as my equity to bond volatility ratio. In this case the volatility of the bond fund is a proxy for duration as well.

Then I took (volatility_UPRO * 0.XX) / (volatility_EDV * (1-0.XX)) and iterated on XX until the ratio was equal to the 55/45 UPRO/TMF option.
How did you calculate that 55/45 UPRO/TMF has ~28% more leverage than 43/57 UPRO/EDV? Just by comparing standard deviations of the portfolios?

What did you take as the long-term volatility of simulated UPRO, TMF, and EDV? I used 45.27% for UPRO, 29.79% for TMF and 21.63% for EDV and found the allocation to be 47/53 UPRO/EDV instead of 43/57 UPRO/EDV.

Have you considered the approach of matching the overall portfolio volatility of 55/45 UPRO/TMF with that of UPRO/EDV instead of matching their equity to bond volatility ratios? Assuming 55/45 UPRO/TMF has a long-term volatility of 27%, we get a similar long-term volatility with 60/40 UPRO/EDV. What are your thoughts on this approach and on 60/40 UPRO/EDV?

Is matching the equity to bond volatility ratio the better approach than matching overall volatility?
MotoTrojan
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

calcada wrote: Sat Oct 17, 2020 3:02 pm
MotoTrojan wrote: Sat Oct 12, 2019 12:11 pm It is all about the ratio of volatility of equity to volatility of treasuries. TMF moves more than EDV. The best way to think about it is that 55/45 UPRO/TMF and 43/57 UPRO/EDV are the same portfolio (same ratio of volatility over the long run) but the 55/45 UPRO/TMF one has ~28% more leverage overall. More leverage does not always mean more return, and it does always mean more risk.

1st I got the long-term volatility of simulated UPRO, TMF, and EDV from 1955-2018 using the Simba spreadsheet. You could do the same using Portfolio Visualizer but I don't have simulated EDV data back since VEDTX inception.

Then I took (volatility_UPRO * 0.55) / (volatility_TMF * 0.45) and set that as my equity to bond volatility ratio. In this case the volatility of the bond fund is a proxy for duration as well.

Then I took (volatility_UPRO * 0.XX) / (volatility_EDV * (1-0.XX)) and iterated on XX until the ratio was equal to the 55/45 UPRO/TMF option.
How did you calculate that 55/45 UPRO/TMF has ~28% more leverage than 43/57 UPRO/EDV? Just by comparing standard deviations of the portfolios?

What did you take as the long-term volatility of simulated UPRO, TMF, and EDV? I used 45.27% for UPRO, 29.79% for TMF and 21.63% for EDV and found the allocation to be 47/53 UPRO/EDV instead of 43/57 UPRO/EDV.

Have you considered the approach of matching the overall portfolio volatility of 55/45 UPRO/TMF with that of UPRO/EDV instead of matching their equity to bond volatility ratios? Assuming 55/45 UPRO/TMF has a long-term volatility of 27%, we get a similar long-term volatility with 60/40 UPRO/EDV. What are your thoughts on this approach and on 60/40 UPRO/EDV?

Is matching the equity to bond volatility ratio the better approach than matching overall volatility?
I don't have the numbers handy but I pulled them from the Simba spreadsheet's annual volatility, I believe from 1955-2018. I don't have the Simba with 3x data handy but multiplying S&P500 and LTT by 3 I am getting 50.2% UPRO, 33.7% TMF, 24.4% EDV which would indeed suggest closer to 47/53 as you noted; maybe I made an error back in the day, or maybe the Simba data for the 3x funds had volatility calculated differently.

I calculated that it is 28% more leverage because it is 28% more equity (55 / 43 = 1.28).

I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
coingaroo
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

newguy123 wrote: Thu Oct 15, 2020 8:45 pm I have a question about a catastrophe loss risk

Which is more risky

100% in a stock like Apple or Microsoft (buy and hold for 10 years ) with no stop loss

Or

100% in tqqq or upro for 10 years with a 20% stop loss ?

For some reason I am thinking all in one stock is less risky and probably would have better returns . The biggest risk would be bankruptcy for the single stock
Both are seriously risky: if you have a 20% stop loss on a 3x leveraged instrument, you'll trigger the stop loss in less than 3 months. If you buy an individual stock, you can get completely wiped out, and even worse, you are not rewarded for diversifiable risk (i.e. it won't perform any better than an index fund).
thwang99
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
nehawk87
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

MotoTrojan wrote: Sat Oct 17, 2020 3:30 pm I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
Thank you for your explanation. May I ask why have you exited the position so quickly? It is supposed to be a 20-30 year adventure after all. The logic behind your proposed 47/53 UPRO/EDV seems solid enough.

Doesn't 55/45 UPRO/TMF have 55% more leverage compared to 47/53 UPRO/EDV given their total allocations of 300% and 194% respectively?

An alternative for those who want to mix in unleveraged treasuries (EDV) instead of replacing TMF entirely could be 53/27/20 UPRO/EDV/TMF (EDV and TMF are proportioned to have the same volatility) or 54/23/23 UPRO/EDV/TMF (EDV and TMF equally proportioned).

By your logic 55/45 UPRO/TMF, 47/53 UPRO/EDV, 53/27/20 UPRO/EDV/TMF and 54/23/23 UPRO/EDV/TMF would all be the same portfolio with the same equity to bond volatility ratio but with varying leverage.

Would you also mind sharing what kind of factor loads you are targeting in your equity portfolio?
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Has anyone implemented this strategy by including EDV? Care to share your allocations?
thwang99
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

nehawk87 wrote: Sun Oct 18, 2020 12:40 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
Yeah, shorting the short funds. I should have put them both on one link BTW.
PicassoSparks
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Mechanically, how will you short the short funds and what are the costs?

Implementation is the devil.
MotoTrojan
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

calcada wrote: Sun Oct 18, 2020 2:04 pm
MotoTrojan wrote: Sat Oct 17, 2020 3:30 pm I don't see any logic in using UPRO/EDV but mirroring the overall portfolio volatility of 55/45 UPRO/TMF; why target an arbitrary volatility with an entirely different portfolio (more equity heavy)? Generally with these risk-parity portfolios you take the most efficient unleveraged portfolio (max sharpe ratio) and then lever it up evenly to your target volatility. I basically did the opposite and said I like the way Hedgefundie's 55/45 UPRO/TMF balances the risks/returns of equities and treasury-duration exposure, but I want to knockdown the overall volatility some, while also using a more efficient fund on the bond-side.

Anyways, I exited this position a good while ago for a healthy profit and am now 100% equity with strong factor tilts. Good luck!
Thank you for your explanation. May I ask why have you exited the position so quickly? It is supposed to be a 20-30 year adventure after all. The logic behind your proposed 47/53 UPRO/EDV seems solid enough.

Doesn't 55/45 UPRO/TMF have 55% more leverage compared to 47/53 UPRO/EDV given their total allocations of 300% and 194% respectively?

An alternative for those who want to mix in unleveraged treasuries (EDV) instead of replacing TMF entirely could be 53/27/20 UPRO/EDV/TMF (EDV and TMF are proportioned to have the same volatility) or 54/23/23 UPRO/EDV/TMF (EDV and TMF equally proportioned).

By your logic 55/45 UPRO/TMF, 47/53 UPRO/EDV, 53/27/20 UPRO/EDV/TMF and 54/23/23 UPRO/EDV/TMF would all be the same portfolio with the same equity to bond volatility ratio but with varying leverage.

Would you also mind sharing what kind of factor loads you are targeting in your equity portfolio?
I am giving EDV credit for its extra duration relative long-treasuries and calling that leverage. Given that volatility ratio is equivalent I think comparing the allocation of UPRO to get 28% is more intuitive or meaningful than the ratio of leverage on the underlying. I could use say 20x leverage on short term bonds and call that way more leverage, but in reality it’s the same duration exposure as 57% EDV, 45% TMF, etc.

After more research I felt the expected return over the market was far less than the 1982-present backtest would suggest and opted for a different approach. I still think it’s a sound approach but current yields are not very attractive. I do plan to someday add long treasuries and maybe even gold (or TIPS) as diversifiers but stick with equity heavy.

I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.

Target exposure is somewhere in the 0.4+ HML and 0.3+ SmB realm with some quality exposure. Hard to perfectly target that as I use some Alpha Architect funds which don’t regress on FF factors well.

25% S&P500
25% VBR
15% QVAL
25% FNDC
10% IVAL
MotoTrojan
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

nehawk87 wrote: Sun Oct 18, 2020 12:40 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
In your SQQQ/TBT short... you're putting in a negative value in PV for the allocation. Just to be clear, you're shorting the short funds (SQQQ)?
Gives you 3x exposure with volatility decay working for you instead of against. In theory it’s way better than using the normal long 3x bull funds as those are subject to vol decay dragging on returns. I’m amazed the costs to short these isn’t too high to make it profitable, if true.
langlands
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
This thread is so long that inevitably we begin running around in circles. The validity of shorting leveraged ETFs to "harvest" the volatility decay has already been discussed at length about 20 pages ago.

You say that "Shorting instead of going long has been talked about." Did you take a look at viewtopic.php?p=5399207#p5399207 and the subsequent discussion?

I will simply reiterate what I said then that shorting volatility decay is not a free lunch and that shorting SQQQ and rebalancing on a daily basis is the same as going long TQQQ (excluding expenses, borrowing costs).
Semantics
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

langlands wrote: Sun Oct 18, 2020 10:51 pm
thwang99 wrote: Sun Oct 18, 2020 8:11 am Shorting instead of going long has been talked about. I did a quick and dirty test using PV, and shorting has higher CAGR while having lower max drawdown and a significantly higher Sharpe ratio. What reasons are there not to use the shorting strategy? I picked TBT since it is easily shorted on IB (I actually did short SQQQ/TBT successfully for a few months).

(I know the ratio of 60/40 isn't optimized, but it's more the comparison we care about here)

TQQQ/UBT long: https://www.portfoliovisualizer.com/bac ... tion2_1=40

SQQQ/TBT short: https://www.portfoliovisualizer.com/bac ... ion2_1=-40
This thread is so long that inevitably we begin running around in circles. The validity of shorting leveraged ETFs to "harvest" the volatility decay has already been discussed at length about 20 pages ago.

You say that "Shorting instead of going long has been talked about." Did you take a look at viewtopic.php?p=5399207#p5399207 and the subsequent discussion?

I will simply reiterate what I said then that shorting volatility decay is not a free lunch and that shorting SQQQ and rebalancing on a daily basis is the same as going long TQQQ (excluding expenses, borrowing costs).
+1, there is no free lunch.

The problem is these funds didn't exist during the 2000 and 2008 crashes, so folks can't see how dangerous they are. But we can crudely estimate in PV on a monthly basis for 2008-2009, using a 55/45 allocation to monthly leveraged SPY and TLT.

https://www.portfoliovisualizer.com/bac ... ion3_2=135

What this suggests is that shorting SPXS/TMV would have been much better (-3.83% over the two years) than longing SPXL/TMF (-35.13%). But only if the position was held through a 104% loss. At the bottom of the market, the long strategy would have been down 64% from its original value, while the short strategy would have been completely wiped out. Not to mention that as the market goes down and the short exposure goes up, so do the borrowing costs. Another way to look at this is if TQQQ goes down 10% for five days, you've lost 41% of your investment. If SQQQ goes up 10% for five, you've lost 61%. So during a steady decline, the short position has the potential to lose far more, however because the exposure is increasing rather than decreasing, it will also recover faster. That recovery is an example of the anti-volatility decay benefit, but the tradeoff is more risk. PV doesn't capture that risk since it uses monthly numbers.

Now, maybe the investor has a lot of other assets and is okay with being wiped out, but since maintenance margin is something like 90% for leveraged ETFs, at the worst point she would have only been able to keep a little over 50% of her portfolio in this. And bearing in mind the rest of the portfolio likely would be down too, that's maybe more like 25% of her portfolio that could have safely be held just prior to 2008. If she held more than that, the broker starts closing positions and that kills the excess returns.

In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%). What this looks like in a typical rising market is that the majority of the gains get moved into regular HFEA holdings rather than reinvested, so I won't see anything close to the difference in returns seen in PV backtests. In order to fully realize the difference in CAGR you need to fully reinvest in the short strategy and let it compound.

There are a few unique properties that are nice though, apart from volatility decay working in your favor, mostly taxation related. 1) Little rebalancing is needed with a fixed allocation, since if stocks go up and bonds go down, the short exposure will do the opposite, so it is largely self-balancing. 2) Rebalancing is tax free or even a tax loss harvest because you only ever close positions that lost value, otherwise you're just shorting more. 3) Borrowing fees can be deducted from taxes, so aren't as much of a drag as they might seem. 4) I maintain -100% funds +200% cash, which provides extra liquidity in a pinch, i.e. I can effectively borrow against myself; more aggressive investors might deploy that 200% somewhere other than cash the whole time. 5) When the market goes down and I need to close positions to restore the -100% funds +200% cash ratio, it's a tax loss.
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

MotoTrojan wrote: Sun Oct 18, 2020 9:21 pm I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.
I recalculated with annual volatilities from Simba's LETF spreadsheet. I get 52.72% for UPRO, 39.35% for TMF and 24.06% for EDV. You were indeed correct with the 43/57 UPRO/EDV being equal to 55/45 UPRO/TMF.

I calculate that the following portfolios are all the same with the same equity to bond volatility ratios but with varying leverage. Also copied CAGR and StDev from the spreadsheet (1955-). I hope it makes more sense.

55/45 UPRO/TMF
12.99% 33.58%
43/57 UPRO/EDV
11.67% 26.66%
48/32.3/19.7 UPRO/EDV/TMF (EDV and TMF proportioned to have the same volatility)
12.29% 29.53%
50/25/25 UPRO/EDV/TMF (EDV and TMF equally proportioned)
12.5% 30.54%
MotoTrojan
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

calcada wrote: Mon Oct 19, 2020 1:58 pm
MotoTrojan wrote: Sun Oct 18, 2020 9:21 pm I’m not following how your allocations with 53-54% UPRO and that much EDV are the same ratio, that much TMF going to EDV is a big change with almost no change in equity.
I recalculated with annual volatilities from Simba's LETF spreadsheet. I get 52.72% for UPRO, 39.35% for TMF and 24.06% for EDV. You were indeed correct with the 43/57 UPRO/EDV being equal to 55/45 UPRO/TMF.

I calculate that the following portfolios are all the same with the same equity to bond volatility ratios but with varying leverage. Also copied CAGR and StDev from the spreadsheet (1955-). I hope it makes more sense.

55/45 UPRO/TMF
12.99% 33.58%
43/57 UPRO/EDV
11.67% 26.66%
48/32.3/19.7 UPRO/EDV/TMF (EDV and TMF proportioned to have the same volatility)
12.29% 29.53%
50/25/25 UPRO/EDV/TMF (EDV and TMF equally proportioned)
12.5% 30.54%
Those look more in-line. Simplicity is a nice thing to have so I would go big (TMF) or go prudent (EDV).
Maverick3320
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
statefan03
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Greed is hard to control.
Crushtheturtle
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
I'm paraphrasing, but Mr. Bogle is on record as stating that holding leveraged equity is the best strategy, as long as you have someone "to bail you out at the bottom."

I'm not sure if he was aware of these products, so I wouldn't be quick to assume his opinion on their utility.
If you're not having fun, you'll just have to pretend.
firebirdparts
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
Well, most of the posts are people asking whether somebody would reiterate everything that's been said, because they don't want to read it all.
A fool and your money are soon partners
coingaroo
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Maverick3320 wrote: Tue Oct 20, 2020 6:43 am Does it strike anyone else as odd that the longest post in BH history concerns financial actions that Bogle probably wouldn't approve of?
Holding a diversified basket of US Stocks and Treasury Bonds, in Sharpe-optimal ratios, with the understanding this is a long term, 10-20+ year investment, in the most cost efficient form that is readily accessible to the public right now (it's still expensive, but we still try to optimise for cheapness within this asset class)?
tomphilly
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Semantics wrote: Mon Oct 19, 2020 12:50 am In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%).
How are you selecting strike price and expiration? How long do you hold options and do you let them expire worthless? I tried this a couple of months ago and the difficulty I found was matching the leverage of the two assets - would SPXS and TMV put options bought ATM with the same expiration have roughly the same leverage and volatility? That seemed like an assumption and despite thinking you have roughly a 60/40 or 55/45 or whatever you intended, the actual allocation might be different.
Semantics
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

tomphilly wrote: Tue Oct 20, 2020 9:56 am
Semantics wrote: Mon Oct 19, 2020 12:50 am In... short... this strategy is interesting, but limited in practice. I am employing it for fun, but I am keeping my exposure to 3% of my overall portfolio for safety (so when the value increases, I'll short more to bring it up to 3%, when it goes down I'll close positions to bring it back to 3%).
How are you selecting strike price and expiration? How long do you hold options and do you let them expire worthless? I tried this a couple of months ago and the difficulty I found was matching the leverage of the two assets - would SPXS and TMV put options bought ATM with the same expiration have roughly the same leverage and volatility? That seemed like an assumption and despite thinking you have roughly a 60/40 or 55/45 or whatever you intended, the actual allocation might be different.
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
Thereum
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### Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Semantics wrote: Tue Oct 20, 2020 1:29 pm
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
That was me. I was selling SQQQ call spreads and buying puts. Lately, I've stopped buying the long calls because I have a bit more confidence in the strategy. My positions right now are essentially short synthetics, with short diagonals/calendars on SQQQ when I am concerned about a crash. So far these hedges have worked perfectly.

Overall, it's been very profitable for me, even with the recent correction in September. QQQ and TQQQ are both below their peaks -- 6% and 20% respectively. Meanwhile, SQQQ is only 7% above its all time low. So far, I have about a 10% profit on the total delta exposure for SQQQ. This is truly an amazing strategy.

As for shorting TMV, I have moved in favor of going long EDV and shorting TMF. I believe TMF will be a dramatic loser in the coming years, as rates rise overall with a lot of choppiness in between. Even if rates fall, long EDV/short TMF is a winner. TMF is a dud going forward.
Semantics
Posts: 143
Joined: Tue Mar 10, 2020 1:42 pm

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

Thereum wrote: Wed Oct 21, 2020 5:53 pm
Semantics wrote: Tue Oct 20, 2020 1:29 pm
I'm not using options, I am directly shorting SPXS. TMV has high borrowing costs at my broker so I don't touch it. There was a poster earlier in the thread who was using options though (a couple months ago), using a complicated strategy where he would also sell a couple of options to (I think) be theta neutral. I agree that there are lots of assumptions with options, and I don't expect they would return as much for the same amount of leverage since they are less risky than shorting and there's no free lunch.
That was me. I was selling SQQQ call spreads and buying puts. Lately, I've stopped buying the long calls because I have a bit more confidence in the strategy. My positions right now are essentially short synthetics, with short diagonals/calendars on SQQQ when I am concerned about a crash. So far these hedges have worked perfectly.

Overall, it's been very profitable for me, even with the recent correction in September. QQQ and TQQQ are both below their peaks -- 6% and 20% respectively. Meanwhile, SQQQ is only 7% above its all time low. So far, I have about a 10% profit on the total delta exposure for SQQQ. This is truly an amazing strategy.

As for shorting TMV, I have moved in favor of going long EDV and shorting TMF. I believe TMF will be a dramatic loser in the coming years, as rates rise overall with a lot of choppiness in between. Even if rates fall, long EDV/short TMF is a winner. TMF is a dud going forward.
What ratio do you hold +EDV -TMF in? 1:1? I've definitely soured on TMF in this strategy due to their high borrowing fees and low yields, but if they mostly cancel each other out I guess your profits would come from capturing the high fees and volatility drag, but it looks like TMF is not particularly cheap to borrow (probably for this reason), and the options don't look super liquid.