perfectuncertainty wrote: ↑Thu Oct 29, 2020 12:32 am
Here is a detailed description of how HFEA (55/45 UPRO/TMF) portfolio has performed with the protection of a VIX options hedge. The numbers are refined from my prior post which overstated the performance. The reason for the overstatement was due to the fact that I did not derive the current monthly value of HFEA to be used as a basis for purchasing the monthly VIX option tranches that would be in effect in mid-March 2020. Nevertheless, the performance of HFEA with the protection of the VIX options hedge was substantially better than the performance of HFEA without the benefit of the insurance that was in effect since the beginning of the model.
Start Date of 9/1/2011 based on stockmaster's question on page 132 of this thread.
Starting Capital: 100,000
Allocation: 55% UPRO / 45% TMF
UPRO Peak is the focus and occurred on 2/19/2020
VIX Hedge Setup.
We start with the 100,000 in starting capital
Allocate 0.3% of Net Liq each month and buy 10 delta VIX call options ~ 120 days to expiration. Purchase this on the 3rd Friday of the month.
This created 4 tranches of VIX call options that would be in effect during mid-March 2020.
The tranches were as follows:
11/15/2019 Net Liq: 648,793 to purchase VIX call options expiring on 3/18/2020. Strike price 45.00 Cost per option 0.300. Number purchased 6,400.
12/15/2019 Net Liq: 653,806 to purchase VIX call options expiring on 4/15/2020. Strike price 45.00 Cost per option 0.275. Number purchased 7,100.
01/15/2020 Net Liq: 718,380 to purchase VIX call options expiring on 5/20/2020. Strike price 40.00 Cost per option 0.200. Number purchased 10,700.
02/15/2020 Net Liq: 778,954 to purchase VIX call options expiring on 6/17/2020. Strike price 42.50. Cost per option 0.200. Number purchased 8,400.
Total Cost of the VIX Options Hedge in effect in mid-March 2020: 8,399.80
HFEA Value as of2/19/2020.
As of 2/19/2020 HFEA with the VIX Hedge applied each month since 9/1/2011 was worth 778,954.40.
This is derived using PV and daily prices from TradingView charts as follows:
PV Model with 0.3% monthly withdrawal LINK
As of 1/31/2020 HFEA with VIX Hedge applied had a Final Balance of 718,380
Price UPRO on 1/31/2020 = 69.37
Price of TMF on 1/31/2020 = 31.99
UPRO 55% allocation = 5,696 shares
TMF 45% allocation = 10,105 shares
Price of UPRO on 2/19/2020 = 80.36
Price of TMF on 2/19/2020 = 31.79
Using the # of shares for each calculated above the value for HFEA with the monthly 0.3% allocation for the VIX hedge is 778,954.40.
Performance During Mid-March 2020 for HFEA and the VIX Option Hedge
By 3/9/2020, HFEA declined by 3.57% from the 2/19 highpoint to a value of 751,182.60.
By 3/13/2020, HFEA declined by 25.64% from the 2/19 highpoint to a value of 579,204.14.
By 3/16/2020, HFEA declined by 26.86% from the 2/19 highpoint to a value of 569,763.08.
By 3/9/2020, the VIX hedge increased by 1242.53% to a value of 104,370.00.
By 3/13/2020, the VIX hedge increased by 2549.63% to a value of 214,164.00.
By 3/16/2020, the VIX hedge increased by 6912.03% to a value of 580,597.00.
By 3/9/2020, HFEA combined with the VIX hedge increased by 9.83% to a value of 855,552.60.
By 3/13/2020, HFEA combined with the VIX hedge increased by 1.85% to a value of 793,368.14.
By 3/16/2020, HFEA combined with the VIX hedge increased by 47.68% to a value of 1,150,360.08.
Point of Reference
As a point of reference if one had not utilized any hedging HFEA would have been worth 1,055,118.98 on 2/19/2020 but worth 771,762.57 on 3/16/2020.
This model and analysis does not include any application of hedging comparison for declines in HFEA in August 2015, February of 2018, and December 2018 even though the costs of the protection are modeled as being in effect at that time. The VIX hedge would have provided substantial benefit in 2008 and contained any drawdown. And again in 2010 and 2011 - I have not modeled those periods to ascertain how effective the insurance would have been.
Here is my spreadsheet with the analysis for 3/2020 LINK