HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
RovenSkyfall
Posts: 267
Joined: Wed Apr 01, 2020 11:40 am

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

Post by RovenSkyfall »

willthrill81 wrote: Tue Jan 05, 2021 11:02 am
Marseille07 wrote: Tue Jan 05, 2021 11:00 am
willthrill81 wrote: Tue Jan 05, 2021 10:53 am
tomphilly wrote: Tue Jan 05, 2021 10:29 am Does anyone know the probability of a 2008 style crash? Is it once in 25 years?
No one knows the probability, most likely because the probability of such a crash is constantly changing.

You repeatedly say that you are 'nervous'. If this is the case, then you should really rethink your approach with this strategy. Occasional big drawdowns will happen, no matter what any backtest indicates. It's the nature of highly leveraged positions.
Well the OP was 80/20 UPRO/TMF and they're right to be very nervous about that. That's some crazy AA if / when the market crashes. HEDGEFUNDIE "works" only because the underlying AA is relatively a safe one (like 60/40, 40/60).
Yes, but notice that even after switching back to 60/40, tomphilly is still nervous.
I know Uncorrelated intellectually destroyed my rational for a stop loss (and I think they are right), but if your concern is fund dissolution of UPRO you can irrationally get out of the market with something like a 50% or 75% drop in UPRO, knowing that you may lock in a real loss by the time you get back in, but possibly avoid a total loss of UPRO (in this case though, you are really only avoiding a 50% or 25% loss of your UPRO value). The caveat here is that since the future of the market is unknown, you are unlikely to really know when it would be safe to get back in (and hence why you will likely lose money). Additionally, as Uncorrelated pointed out before, you would NOT want an actual stop loss order as the prices in this situation may cause you to sell at price which is not aligned with the real value. If you are using HFEA with 5-10% of your portfolio it may be too much work and you could likely afford UPRO fund dissolution, and if you are using HFEA for your whole portfolio this could lead to significant losses in your portfolio.

Ultimately you really ought to decided if you are okay with the actual risk of HFEA or if you are not.
I saved my money, but it can't save me | The Chariot
hilink73
Posts: 582
Joined: Tue Sep 20, 2016 3:29 pm

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

Post by hilink73 »

LeverageWBeverage wrote: Mon Jan 04, 2021 8:29 am I just tried to put this trade on but my Wells Fargo IRA is restricted on TMF. I called them and it's a no go. They won't allow trading in that symbol. Where do I need to transfer my acct to trade this? I know some use M1 but i downloaded the app and don't like the interface. Curious what people are using. Thanks
Interactive Brokers
User avatar
RovenSkyfall
Posts: 267
Joined: Wed Apr 01, 2020 11:40 am

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

Post by RovenSkyfall »

LeverageWBeverage wrote: Mon Jan 04, 2021 8:29 am I just tried to put this trade on but my Wells Fargo IRA is restricted on TMF. I called them and it's a no go. They won't allow trading in that symbol. Where do I need to transfer my acct to trade this? I know some use M1 but i downloaded the app and don't like the interface. Curious what people are using. Thanks
Fidelity also allows TMF and UPRO.
I saved my money, but it can't save me | The Chariot
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Put my stimulus money into interactive brokers to test out shorting sqqq and tbt but it turns out you need $2000 minimum to short shares. May try again once I feel like loading more money. Currently have about a quarter of my NW in this only because most of it is tied up in home equity, although that property will be selling soon and I will have that freed up.
saabaero
Posts: 4
Joined: Tue Jan 05, 2021 12:50 pm

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

Post by saabaero »

Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.

I was interested in replicating the results of this paper, extending the findings to the end of 2020 (the paper stops in 2017), and finding if the option portfolio would hedge a leveraged stock portfolio holding UPRO (3X leveraged S&P500).

Step 0: Obtain data, write backtest code

Option data: I obtained end of day option prices for the SPX index from a subscription to OptionMetrics for 1996-2019. 2020 data were purchased from historicaloptiondata.com.

Extended UPRO and TMF data: These products began trading in 2009, but we definitely want to include the early 2000s dotcom crash and 2008 financial crisis in our backtests. Someone on the bogleheads forum simulated the funds going back to 1986.

Backtesting: I wrote a simple program to backtest an option portfolio in R. This program buys a 30 DTE spread as described above and typically holds to expiration. When VIX is low, a fixed percentage of the portfolio value is placed into the option portion during each rebalance, which occurs when the options expire. When VIX is high (above mean plus one standard deviation), the portfolio only holds the base asset class. If VIX transitions from low to high, the hedge is immediately abandoned, and if VIX transitions from high to low, the hedge is repurchased.

Step 1: replicate the results of Doran (2020) with the SPX index

To ensure our option backtest works as expected, I first replicated the results from the Doran paper using the SPX index. I allocated a fixed 5% to the hedge. I found performance was improved by using options 10% ITM or OTM, so these were used in all backtests. Below are the returns of these portfolios from 1996-2020, starting with $100,000. Although the hedge does well in negative markets, the under performance in the bull market of the last 10 years is quite apparent. The hedge also didn’t protect much against the rapid COVID crash in March 2020 – I think because VIX spiked very quickly and the portfolio wasn’t hedged for much of the crash. My results don’t exactly match those in the paper (even using a 5% spread width). I think differences in the option prices, especially early in the dataset, are playing a role in this.

Image
SPX: un-hedged. OPT: always hedged 5%. OPTsd: hedged 5% when VIX is below the mean plus one standard deviation.

Code: Select all

                         | SPX | OPT | OPTsd
-------------------------|-----|-----|----
CAGR                     |7.49 |2.91 |7.08
Sharpe ratio (Annualized)|0.48 |0.39 |0.64
StdDev (Annualized)      |15.3 |7.71 |11.23
Worst drawdown           |52.5 |35.2 |41.2
Step 2: extend the option hedge to a portfolio holding UPRO

How does the hedge work using 3X leveraged fund UPRO? I conducted the same backtest, and found that 10% allocated to the hedge is better. This makes sense – you need something with higher volatility to balance out the extreme swings in UPRO. Hedged performance is definitely better than holding UPRO alone, which has pathetic stats over this time period. Better returns than holding SPX alone, but more variance and a equivalent Sharpe ratio. Holding the VIX as an asset is still the winner here.

Image
SPX: un-hedged, UPRO: un-hedged, UPROvixsd: holding VIX as hedge when VIX is low, UPROoptsd: holding option hedge when VIX is low.

Code: Select all

                         | SPX | UPRO | UPROoptsd | UPROvixsd
-------------------------|-----|------|-----------|----
CAGR                     |7.49 |9.71  |15.1       |21.6
Sharpe ratio (Annualized)|0.48 |0.20  |0.49       |0.53
StdDev (Annualized)      |15.3 |46.8  |31.6       |40.5
Worst drawdown           |52.5 |97.4  |87.7       |91.7
Comparison to a UPRO/TMF portfolio

The option-hedged portfolio needs to outperform a 55/45% UPRO/TMF portfolio for me to consider running it for real. I used portfoliovisualizer.com to easily compare these portfolios with monthly rebalancing.

Image
Portfolio 1 (blue) : UPROoptsd Portfolio 2 (red) : UPRO/TMF 55/45 Portfolio 3 (yellow): UPRO/VIX 70/30

The returns with TMF have less variance than the option hedged portfolio and end up almost exactly equal at the end of this time period. However, in 1996-2008, the option portfolio definitely outperformed. Holding VIX is again the clear winner in both absolute and risk-adjusted returns, but still suffers severe drawdowns.

Conclusions

I don’t think holding this portfolio will provide a significant advantage compared to a UPRO/TMF portfolio. Given the limitations below and no significant advantage in the backtest, I won’t be voting with my wallet. The option hedge portfolio did provide significant advantages in the 1996-2008 period, where it outperformed all other portfolios (even the optimal 70/30 UPRO/VIX!) with a Sharpe ratio of 1.01 and max drawdown of 47% in the dotcom crash. I may paper-trade this strategy to get a feel for position sizing, slippage and fills on these spreads, though.

Limitations: Why I won’t be hedging with this method

1. This model assumes all transactions occur at the midpoint of the bid-ask spread and does not take into account transaction costs. While transaction costs are relatively small, SPX and XSP can have relatively wide bid-ask spreads, much wider than SPY.
2. Options can by illiquid, only purchased in fixed quantities, and difficult to adjust. Today with SPX at 3750, Buying one SPX 30d 5% ITM-OTM put spread costs $16100. Adding the call spread brings the cost down to $9340 but brings the max loss of the position to $27340! Trading on XSP brings the cost down by a factor of 10. With a 1% hedge, this method is only good for portfolios >100k. As a 5% hedge this can be used on a portfolio as small as 20k. Still, what do you do when the optimal amount of hedge is 1.5 XSP contracts?
3. It’s more complicated than simply rebalancing between UPRO and TMF, requiring more active management time.
4. The option hedge didn’t even outperform UPRO/TMF in some regards!
5. Backtests are only backward-looking and easy to overfit to your problem.

Future directions to explore

1. Optimal hedge amount – was not optimized scientifically, I just tried a few values and decided based on returns and Sharpe ratio.
2. Differing DTE on position opening an closing. 30 days and holding to expiration may not be optimal.
3. Selecting strikes based on Delta instead of fixed percentage ITM/OTM. This would result in different strikes selected in times of low and high vol, but probably has a minimal impact.
4. The max loss of these spreads can be quite high compared to the cost to enter the trade – maybe the hedge amount should be scaled based on the max loss of the position (with the remaining invested in the base asset or held in cash).

Questions? Other ideas to test? Let me know! I’ll also happily release returns or code (it’s not pretty) if you are interested.

References:

1. Doran, J. S. Volatility as an asset class: Holding VIX in a portfolio. Journal of Futures Markets 40, 841–859 (2020).
2. Ayres, I. & Nalebuff, B. J. Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk. https://papers.ssrn.com/abstract=1149340 (2008).
3. Ayres, I. & Nalebuff, B. J. Diversification Across Time. https://papers.ssrn.com/abstract=1687272 (2010).
User avatar
tomphilly
Posts: 177
Joined: Wed Aug 05, 2020 11:29 am
Location: Philadelphia

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

Post by tomphilly »

willthrill81 wrote: Tue Jan 05, 2021 11:02 am Yes, but notice that even after switching back to 60/40, tomphilly is still nervous.
Nervous is probably the wrong word. I've been running variants of HFEA for several years an can stomach big drawdowns, I just like to be vigilant - this isn't a set and forget strategy for me, I try to continually adapt the ratio or the tickers with my sentiment - for example I'm currently reducing my TQQQ position in the 60% equities portion. That said, can anyone here honestly say they've experienced and are comfortable riding through a 2008-style drawdown with 3x ETFs? I'm guessing no because they didn't exist then. I think it's OK to express concerns with something that you're doing, you'd be a chump if you were completely content with any investment strategy.
User avatar
cos
Posts: 503
Joined: Fri Aug 23, 2019 7:34 pm
Location: Boston
Contact:

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

Post by cos »

LeverageWBeverage wrote: Tue Jan 05, 2021 8:45 am
cos wrote: Tue Jan 05, 2021 2:45 am
LeverageWBeverage wrote: Mon Jan 04, 2021 1:39 pm Anyone doing 65/35? It gives the best return on Portfolio Vizualizer. But that only goes back to 2010 when these ETFs started. So basically best return during a 10 year bull market. No bear market but the blip in March.
Huh? I'm not able to replicate that: https://www.portfoliovisualizer.com/opt ... ints=false

Looks like 85/15 has the highest CAGR. 80/20 with quarterly rebalancing.
Maybe our settings are slightly different. This is what i am seeing. I am also doing quarterly rebalancing. But even if the CGAR is a wee bit higher, the max drawdown on 65/35 is not bad.

https://www.portfoliovisualizer.com/bac ... n2_3=14.49
Ah, I see. Your simulation starts in January of 2010 while the one I linked starts in July of 2009. It's crazy how much of a difference 6 months makes. Says a lot about backtests!
User avatar
noraz123
Posts: 474
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

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

Post by noraz123 »

jaj2276 wrote: Sat Dec 26, 2020 6:40 pm ...


56% OG
23.8% 21-day RP
20.1% Target 16 vol

The two non-OG tranches both went heavy bonds a few months this year which wasn't ideal.
...
Thank you for posting this. I have a very small portion (less than 1%) of my portfolio at M1 where I took the 21-day risk parity approach (where I have UPRO/TMF+EDV), with approximately monthly rebalancing, and my return for the year was about was just under 25%.

I couldn't understand how others were getting 40-50%+ for the year. But it seems that simplicity won, with the "OG" fund performing significantly better for 2020. But with the S&P500 returning a total return of 18.4% for 2020 (according to https://www.slickcharts.com/sp500/returns and https://ycharts.com/indices/%5ESPXTR), I will gladly accept the return I received.

I am going to put my 2021 Roth IRA contribution towards this approach, and hope for another year. I plan to keep the 21-day risk parity with UPRO/TMF+EDV, and rebalance monthly.

:sharebeer
SCraw
Posts: 28
Joined: Thu Dec 19, 2019 3:22 pm

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

Post by SCraw »

10Y back above 1%. This’ll be a tough day for the strategy. Kind of hoping this takes a bite out of equity valuations, but I don’t really buy those predictions.
Impatience
Posts: 562
Joined: Thu Jul 23, 2020 3:15 pm

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

Post by Impatience »

I’ve been running this since about August, and boy these treasury moves have eaten up every bit of excess return. I’m about break even with the S&P, will be losing to it after today. But I am optimistic for the long term.
User avatar
Forester
Posts: 2361
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

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

Post by Forester »

Hedgefundie strategy meltdown and likely the story of 2021 - UPRO outpaced by boring vanilla US value & ex-US strategies, while long bonds sell off.
Amateur Self-Taught Senior Macro Strategist
mroe800
Posts: 181
Joined: Mon Jan 27, 2020 1:37 am

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

Post by mroe800 »

Impatience wrote: Wed Jan 06, 2021 10:04 am I’ve been running this since about August, and boy these treasury moves have eaten up every bit of excess return. I’m about break even with the S&P, will be losing to it after today. But I am optimistic for the long term.
I’ve noticed that quarterly rebalancing, for at least the year I’ve been playing, has been better accomplished several days after the quarter end/start. Rebalancing today would have worked out far better than on Monday.
LeverageWBeverage
Posts: 58
Joined: Fri Jan 01, 2021 5:25 pm

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

Post by LeverageWBeverage »

cos wrote: Tue Jan 05, 2021 5:46 pm
LeverageWBeverage wrote: Tue Jan 05, 2021 8:45 am
cos wrote: Tue Jan 05, 2021 2:45 am
LeverageWBeverage wrote: Mon Jan 04, 2021 1:39 pm Anyone doing 65/35? It gives the best return on Portfolio Vizualizer. But that only goes back to 2010 when these ETFs started. So basically best return during a 10 year bull market. No bear market but the blip in March.
Huh? I'm not able to replicate that: https://www.portfoliovisualizer.com/opt ... ints=false

Looks like 85/15 has the highest CAGR. 80/20 with quarterly rebalancing.
Maybe our settings are slightly different. This is what i am seeing. I am also doing quarterly rebalancing. But even if the CGAR is a wee bit higher, the max drawdown on 65/35 is not bad.

https://www.portfoliovisualizer.com/bac ... n2_3=14.49
Ah, I see. Your simulation starts in January of 2010 while the one I linked starts in July of 2009. It's crazy how much of a difference 6 months makes. Says a lot about backtests!
WOW! That is crazy!
LeverageWBeverage
Posts: 58
Joined: Fri Jan 01, 2021 5:25 pm

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

Post by LeverageWBeverage »

I've got many years of experience in equities. I never gave bonds much of a thought other than like 20% of 401k portfolio and rebalance twice a year etc. But can someone explain to me how TMF works. I'm looking at today's move and I am confused. 10 year treasuries are down 29 ticks. So 29/32 =90 basis points. Multiply that by 3x and you get 2.7%. TMF is down over 7%. Is it the 30 year I need to look at or a combination of the two? When I do same calc on 30 year I and multiply by 3 i get down over 8%. Do i need to combine them in some way?
Marseille07
Posts: 11411
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

Optimizing AA using PV's backtest is a fool's errand. The outcome varies wildly depending on the data range as you discovered. Plus, July of 2009 vs January of 2010 may make some difference but ultimately we all need to have 2008 GFC in the data, because we *will* at some point face a big crash in the future.
US & FM (5% seed) | 350K Cash
effigy98
Posts: 81
Joined: Wed Sep 25, 2019 8:57 pm

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

Post by effigy98 »

I'm sticking with VXX as 6% of the adventure despite the fees. It is doing exactly what I need it to do and let me sleep at night. We live in a crazy world right now and anything is possible.
User avatar
tomphilly
Posts: 177
Joined: Wed Aug 05, 2020 11:29 am
Location: Philadelphia

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

Post by tomphilly »

Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
tchoupitoulas
Posts: 70
Joined: Wed Jan 11, 2017 9:20 am

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

Post by tchoupitoulas »

tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

tchoupitoulas wrote: Wed Jan 06, 2021 1:16 pm
tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
If you're just starting with them you get a free trial to upload data.
leyou1286
Posts: 1
Joined: Wed Jan 06, 2021 2:13 pm

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

Post by leyou1286 »

SCraw wrote: Wed Jan 06, 2021 9:51 am 10Y back above 1%. This’ll be a tough day for the strategy. Kind of hoping this takes a bite out of equity valuations, but I don’t really buy those predictions.
It hurts indeed :(
JackoC
Posts: 3754
Joined: Sun Aug 12, 2018 11:14 am

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

Post by JackoC »

saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.

I'd also recommend the book "Tail Risk Hedging" by Bhansali written in 2014. It's not exactly 'no math will be required' level but perhaps less daunting to some than jumping straight into academic papers (many of which, Bhansali's and others, are also referenced in the book). Bhansali's emphasis is stock index put based tail hedging of stock portfolios, whether by direct put buying held to maturity, rules to monetize long put positions according to a rule when market goes down/VIX goes up (that's been historically significantly cheaper on average per unit effectiveness than holding to option maturity at all times) and indirect hedge substitutes, such as long ATM/short OTM put spreads (he shows assumptions under which such a hedge can be equated to being long OTM put at the same strike but a different size, and under those assumptions one or the other hedge is always strictly cheaper) or options on different correlated assets (AUD/USD options as hedge for S&P, etc). His treatment of other topics such as trend following as quasi-tail hedge, VIX options or lowering cost by selling index calls is more of a survey with fewer numerical examples and equations than the index put based stuff, which would appear to be the core of his expertise.

*it's not that 'the VIX isn't investable' in any form, but that the spot VIX is not. Besides unnecessary fees and uncompensated credit risk in ETN's the reason ETF/ETN like VXX etc haven't worked well is they go long the VIX futures (you can pretty easily DIY), which contain a consistent though varying volatility risk premium relative to expected value of the VIX on contract expiration, which you lose as futures converge to spot all else equal. You don't get around that with VIX calls since that premium is incorporated in the price, but the rules of VXTH, though such rules are always subject to accusation of overfitting to relatively short history of past data, were not as expensive from inception to 2020 and spectacularly effective this past spring.
Last edited by JackoC on Wed Jan 06, 2021 3:01 pm, edited 1 time in total.
User avatar
tomphilly
Posts: 177
Joined: Wed Aug 05, 2020 11:29 am
Location: Philadelphia

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

Post by tomphilly »

tchoupitoulas wrote: Wed Jan 06, 2021 1:16 pm
tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
Thanks - I see now, the $39/m plan has data importing. Already paying for the basic plan to get the forward signals...is my curiosity about 2008 worth an additional $240?.... hmm
jarjarM
Posts: 2225
Joined: Mon Jul 16, 2018 1:21 pm

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

Post by jarjarM »

tomphilly wrote: Wed Jan 06, 2021 2:35 pm
tchoupitoulas wrote: Wed Jan 06, 2021 1:16 pm
tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
Thanks - I see now, the $39/m plan has data importing. Already paying for the basic plan to get the forward signals...is my curiosity about 2008 worth an additional $240?.... hmm
Why just 2008? Why not 2000 or 1987?
User avatar
tomphilly
Posts: 177
Joined: Wed Aug 05, 2020 11:29 am
Location: Philadelphia

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

Post by tomphilly »

jarjarM wrote: Wed Jan 06, 2021 3:03 pm
tomphilly wrote: Wed Jan 06, 2021 2:35 pm
tchoupitoulas wrote: Wed Jan 06, 2021 1:16 pm
tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
Thanks - I see now, the $39/m plan has data importing. Already paying for the basic plan to get the forward signals...is my curiosity about 2008 worth an additional $240?.... hmm
Why just 2008? Why not 2000 or 1987?
Isn't 2008 the worst drawdown since 1929? I mean it would be great to look at those other periods too, but 2008 would act as some benchmark to the "worst" HFEA has had to endure in modern times.
User avatar
cos
Posts: 503
Joined: Fri Aug 23, 2019 7:34 pm
Location: Boston
Contact:

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

Post by cos »

tomphilly wrote: Wed Jan 06, 2021 6:27 pm
jarjarM wrote: Wed Jan 06, 2021 3:03 pm Why just 2008? Why not 2000 or 1987?
Isn't 2008 the worst drawdown since 1929?
Yes, but the theoretical behavior of UPRO and TMF is different in every crash.
User avatar
typical.investor
Posts: 3777
Joined: Mon Jun 11, 2018 3:17 am

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

Post by typical.investor »

LeverageWBeverage wrote: Mon Jan 04, 2021 8:29 am I just tried to put this trade on but my Wells Fargo IRA is restricted on TMF. I called them and it's a no go. They won't allow trading in that symbol. Where do I need to transfer my acct to trade this? I know some use M1 but i downloaded the app and don't like the interface. Curious what people are using. Thanks
I use it at Schwab in an IRA and ROTH and recommend it.
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

JackoC wrote: Wed Jan 06, 2021 2:33 pm
saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.

I'd also recommend the book "Tail Risk Hedging" by Bhansali written in 2014. It's not exactly 'no math will be required' level but perhaps less daunting to some than jumping straight into academic papers (many of which, Bhansali's and others, are also referenced in the book). Bhansali's emphasis is stock index put based tail hedging of stock portfolios, whether by direct put buying held to maturity, rules to monetize long put positions according to a rule when market goes down/VIX goes up (that's been historically significantly cheaper on average per unit effectiveness than holding to option maturity at all times) and indirect hedge substitutes, such as long ATM/short OTM put spreads (he shows assumptions under which such a hedge can be equated to being long OTM put at the same strike but a different size, and under those assumptions one or the other hedge is always strictly cheaper) or options on different correlated assets (AUD/USD options as hedge for S&P, etc). His treatment of other topics such as trend following as quasi-tail hedge, VIX options or lowering cost by selling index calls is more of a survey with fewer numerical examples and equations than the index put based stuff, which would appear to be the core of his expertise.

*it's not that 'the VIX isn't investable' in any form, but that the spot VIX is not. Besides unnecessary fees and uncompensated credit risk in ETN's the reason ETF/ETN like VXX etc haven't worked well is they go long the VIX futures (you can pretty easily DIY), which contain a consistent though varying volatility risk premium relative to expected value of the VIX on contract expiration, which you lose as futures converge to spot all else equal. You don't get around that with VIX calls since that premium is incorporated in the price, but the rules of VXTH, though such rules are always subject to accusation of overfitting to relatively short history of past data, were not as expensive from inception to 2020 and spectacularly effective this past spring.
Think this has the potential to replace TMF as the hedge, seems like it handled the last crash very well and I don't see how it wouldn't handle others differently. Or at least 20% VXTH 25% TMF/EDV 55% UPRO/TQQQ. Volatility hedging like this is the future IMO with how bonds are at among their lowest rates.

How would buying 1 month .3 delta calls sound but three times the amount mentioned, either 3% or 1.5% of portfolio based on the underlying forward measurement that is used. What ticker would be used to get the best results with this tail end risk strategy?
saabaero
Posts: 4
Joined: Tue Jan 05, 2021 12:50 pm

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

Post by saabaero »

JackoC wrote: Wed Jan 06, 2021 2:33 pm
saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.
Thanks for your comments and the book recommendation. I'm an academic (although in a completely different field) and papers are my jam, so I'll jump in.

The VXTH method is both really simple and effective (at least for the COVID crash). Whereas the method I was backtesting holds 4 options and has to deal with the complications of a credit spread, a single VIX call would be really easy to systematically DIY. I'll check out their method and run some backtests with UPRO.

Days like today make me think more about the future of volatility-based hedging rather than using TMF - It may be worth the extra effort.
saabaero
Posts: 4
Joined: Tue Jan 05, 2021 12:50 pm

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

Post by saabaero »

Mickelous wrote: Wed Jan 06, 2021 7:25 pm Think this has the potential to replace TMF as the hedge, seems like it handled the last crash very well and I don't see how it wouldn't handle others differently. Or at least 20% VXTH 25% TMF/EDV 55% UPRO/TQQQ. Volatility hedging like this is the future IMO with how bonds are at among their lowest rates.

How would buying 1 month .3 delta calls sound but three times the amount mentioned, either 3% or 1.5% of portfolio based on the underlying forward measurement that is used. What ticker would be used to get the best results with this tail end risk strategy?
I think there's definitely potential, but note that VXTH is an index and you can't directly buy it. Please correct me if I'm wrong. You'd have to set up the calls and roll it every month.
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

saabaero wrote: Wed Jan 06, 2021 8:59 pm
Mickelous wrote: Wed Jan 06, 2021 7:25 pm Think this has the potential to replace TMF as the hedge, seems like it handled the last crash very well and I don't see how it wouldn't handle others differently. Or at least 20% VXTH 25% TMF/EDV 55% UPRO/TQQQ. Volatility hedging like this is the future IMO with how bonds are at among their lowest rates.

How would buying 1 month .3 delta calls sound but three times the amount mentioned, either 3% or 1.5% of portfolio based on the underlying forward measurement that is used. What ticker would be used to get the best results with this tail end risk strategy?
I think there's definitely potential, but note that VXTH is an index and you can't directly buy it. Please correct me if I'm wrong. You'd have to set up the calls and roll it every month.
You're right I looked into it, that's unfortunate.
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Is there a way to easily get an alert when the forward value reaches the desired value to add vix calls to the portfolio? Which ticker would I buy 30% delta calls on.
langlands
Posts: 1093
Joined: Wed Apr 03, 2019 10:05 pm

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

Post by langlands »

Mickelous wrote: Wed Jan 06, 2021 9:12 pm
saabaero wrote: Wed Jan 06, 2021 8:59 pm
Mickelous wrote: Wed Jan 06, 2021 7:25 pm Think this has the potential to replace TMF as the hedge, seems like it handled the last crash very well and I don't see how it wouldn't handle others differently. Or at least 20% VXTH 25% TMF/EDV 55% UPRO/TQQQ. Volatility hedging like this is the future IMO with how bonds are at among their lowest rates.

How would buying 1 month .3 delta calls sound but three times the amount mentioned, either 3% or 1.5% of portfolio based on the underlying forward measurement that is used. What ticker would be used to get the best results with this tail end risk strategy?
I think there's definitely potential, but note that VXTH is an index and you can't directly buy it. Please correct me if I'm wrong. You'd have to set up the calls and roll it every month.
You're right I looked into it, that's unfortunate.
For what it's worth, there used to be an ETF with ticker VIXH that followed the index. But it seemed to never get more than $5 million AUM and closed down in 2017. So for some reason or another, it doesn't seem to be a very popular strategy or there are difficulties implementing the strategy efficiently.
Biazt
Posts: 2
Joined: Sun Jan 03, 2021 2:31 pm

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

Post by Biazt »

saabaero wrote: Wed Jan 06, 2021 8:55 pm
JackoC wrote: Wed Jan 06, 2021 2:33 pm
saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.
Thanks for your comments and the book recommendation. I'm an academic (although in a completely different field) and papers are my jam, so I'll jump in.

The VXTH method is both really simple and effective (at least for the COVID crash). Whereas the method I was backtesting holds 4 options and has to deal with the complications of a credit spread, a single VIX call would be really easy to systematically DIY. I'll check out their method and run some backtests with UPRO.

Days like today make me think more about the future of volatility-based hedging rather than using TMF - It may be worth the extra effort.
An implementation of systematic VIX calls was presented by user perfectuncertainty a few pages ago https://www.bogleheads.org/forum/viewt ... 5#p5626655
Ramjet
Posts: 1461
Joined: Thu Feb 06, 2020 11:45 am

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

Post by Ramjet »

tomphilly wrote: Wed Jan 06, 2021 6:27 pm
jarjarM wrote: Wed Jan 06, 2021 3:03 pm
tomphilly wrote: Wed Jan 06, 2021 2:35 pm
tchoupitoulas wrote: Wed Jan 06, 2021 1:16 pm
tomphilly wrote: Wed Jan 06, 2021 12:07 pm Can anyone explain the steps to load UPROSIM2 and TMFSIM2 from the original HF thread into portfolio visualizer? I don't see where those specific data files reside within the Siamond's Google sheet and I also don't see where I can load custom data files into PV - from HedgeFundie's screenshots it looks like they used PV. I'm really keen to see what happened in 2008 and see how different ratios behaved. Sorry if this has already been explained.

It would be really interesting to see what ratio resulted in complete loss in 2008 and if a target volatility model might have helped mitigate the drawdown or the opposite - based off my very rudimentary approximations using SPY/TLT the UPRO/TMF no-survival ratio would have been around 70/30 and you may have scraped through by the seat of your pants at 65/35.

Also, does anyone know if the market circuit breakers that exist today are different and/or better than they were in 2008?
You need to have the super premium level membership in PV to do this. I forget what it's formally called. They changed the rules sometime at the end of 2019- before then it was all free so you saw many posts from people working with the SIM data. Now it's not so common.
Thanks - I see now, the $39/m plan has data importing. Already paying for the basic plan to get the forward signals...is my curiosity about 2008 worth an additional $240?.... hmm
Why just 2008? Why not 2000 or 1987?
Isn't 2008 the worst drawdown since 1929? I mean it would be great to look at those other periods too, but 2008 would act as some benchmark to the "worst" HFEA has had to endure in modern times.
55/45 for 2008 GFC was 65% drawdown. Someone specifically asked Hedgefundie this question
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Biazt wrote: Thu Jan 07, 2021 6:11 am
saabaero wrote: Wed Jan 06, 2021 8:55 pm
JackoC wrote: Wed Jan 06, 2021 2:33 pm
saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.
Thanks for your comments and the book recommendation. I'm an academic (although in a completely different field) and papers are my jam, so I'll jump in.

The VXTH method is both really simple and effective (at least for the COVID crash). Whereas the method I was backtesting holds 4 options and has to deal with the complications of a credit spread, a single VIX call would be really easy to systematically DIY. I'll check out their method and run some backtests with UPRO.

Days like today make me think more about the future of volatility-based hedging rather than using TMF - It may be worth the extra effort.
An implementation of systematic VIX calls was presented by user perfectuncertainty a few pages ago https://www.bogleheads.org/forum/viewt ... 5#p5626655
That involves always taking a stake in vix rather than the forward looking timing model.
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Anyone know of cheap/free service that will provide a text message alert when VIX reaches a certain quantified measurement, aka when to buy vix call options? Trying to find the rule of thumb to use...

Maybe something like when vix value goes up x% in a week, say 20%, spend 2-3% of portfolio on 2 month .3 delta options on VIXY. I was reading one month may be too short a time frame for a crash as you could end up missing out on gains by getting the option too early. Too bad there isn't an easy way to crunch the numbers on this.

Some more information here on tail risk hedging:
https://warrenfinancial.com/wp-content/ ... 2.0sec.pdf

Any chance I could get approved for options in a fidelity 401k if I was telling them I only wanted to spend a couple percent of my portfolio on the occasional tail risk hedge? :D
anonimo566
Posts: 1
Joined: Thu Jan 07, 2021 7:15 am

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

Post by anonimo566 »

The best is 53% TMF and ,43% UPRO.
Biazt
Posts: 2
Joined: Sun Jan 03, 2021 2:31 pm

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

Post by Biazt »

Mickelous wrote: Thu Jan 07, 2021 1:41 pm
Biazt wrote: Thu Jan 07, 2021 6:11 am
saabaero wrote: Wed Jan 06, 2021 8:55 pm
JackoC wrote: Wed Jan 06, 2021 2:33 pm
saabaero wrote: Tue Jan 05, 2021 1:05 pm Hi all, I recently finished up a side project replicating the results of the Doran (2020) paper "Volatility as an asset class: Holding VIX in a portfolio" and think the results would be of interest to everyone here. If you wish you could hold the cash VIX as an alternative to TMF in this portfolio, read on!

If the VIX were directly investable, holding it as an asset in a portfolio would provide a significant edge. However, you cannot directly “buy” the VIX, and tradable VIX products (like VXX, UVXY, etc) have notable under performance when used as a hedge. A paper by James Doran (2020) proposed that a portfolio of SPX options that is highly correlated to the VIX could be held as a long-term hedge. The portfolio buys an ITM-OTM put spread and sells an ATM-OTM call spread when the VIX is at normal values, and does not hedge when the VIX is above the mean plus one standard deviation. In this way the portfolio systematically removes the hedge when vol is the most expensive and therefore more likely to revert to the mean.
Very long thread I haven't looked in on in a long time so this might have been mentioned previously, but a direct* way to incorporate the VIX in tail hedging is buying calls on the VIX. Again on the off chance this hasn't been discussed to death already see
https://www.cboe.com/us/indices/dashboard/VXTH/
as starting point for this method. The VXTH index is the S&P for a given notional amount with various %'s of that notional per month invested in one month 30% delta VIX calls, that % varying according the level of the VIX as in the table shown in the link. It did *really* well in the March COVID meltdown and bounce back, which played right to its strengths in a way no future meltdown might, but it put VXTH far ahead of the S&P alone going back years. It didn't cope with the 2008-9 crash as exceptionally well, but still roughly comparable reduction in 'draw down' to being 60/40 S&P/treasury rather than 100% S&P.
Thanks for your comments and the book recommendation. I'm an academic (although in a completely different field) and papers are my jam, so I'll jump in.

The VXTH method is both really simple and effective (at least for the COVID crash). Whereas the method I was backtesting holds 4 options and has to deal with the complications of a credit spread, a single VIX call would be really easy to systematically DIY. I'll check out their method and run some backtests with UPRO.

Days like today make me think more about the future of volatility-based hedging rather than using TMF - It may be worth the extra effort.
An implementation of systematic VIX calls was presented by user perfectuncertainty a few pages ago https://www.bogleheads.org/forum/viewt ... 5#p5626655
That involves always taking a stake in vix rather than the forward looking timing model.
If you wanted a forward timing model then you could use a variation of VIX calls using something like Doran's criteria (buy when VIX is above the mean plus one standard deviation), but premium will be expensive since you are only buying when VIX is up compared with the constant stake. This will also limit the upside/hedge should VIX spike further.

You can also look into the methodology VXTH uses, with one month 30 delta calls with portfolio weight dependent on the one month forward value. It would be great to see a backtest and comparison of these methods if saabaero is able.
Mickelous wrote: Thu Jan 07, 2021 5:28 pm Anyone know of cheap/free service that will provide a text message alert when VIX reaches a certain quantified measurement, aka when to buy vix call options? Trying to find the rule of thumb to use...

Maybe something like when vix value goes up x% in a week, say 20%, spend 2-3% of portfolio on 2 month .3 delta options on VIXY. I was reading one month may be too short a time frame for a crash as you could end up missing out on gains by getting the option too early. Too bad there isn't an easy way to crunch the numbers on this.

Some more information here on tail risk hedging:
https://warrenfinancial.com/wp-content/ ... 2.0sec.pdf

Any chance I could get approved for options in a fidelity 401k if I was telling them I only wanted to spend a couple percent of my portfolio on the occasional tail risk hedge? :D
For Fidelity there are some simple alerts you can set up (going up a %) for them to e-mail, text, or ping you in the app. In their Active Trader Pro you can set up conditional options trades (i.e. if VIX goes up 20%, purchase this call option), but I wouldn't recommend it since you have changing deltas, spreads, etc.

If you have BrokerageLink in your 401k, and options are not restricted, you can apply to trade. However, they don't allow you to apply online. You need to print the options form, fill it out, and send to Fidelity (you can use the online secure e-mail option). It takes about 3-5 days to process from receipt.
Marseille07
Posts: 11411
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
US & FM (5% seed) | 350K Cash
User avatar
Meaty
Posts: 831
Joined: Mon Jul 22, 2013 7:35 pm
Location: Florida

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

Post by Meaty »

Considering the 10 year is projected to hit 1.5 this year, how much will TMF fall in price if that occurs? I’m unsure how to calculate
"Discipline equals Freedom" - Jocko Willink
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
What if you constantly have a position in VIX, but you only roll the option further out when volatility is below a certain metric? Just determining what historical metric happens at least once every year or two where you can buy long dated options for. Maybe when it goes below the 200 day moving average you buy long dated options, and as long as it stays below that average you continue to roll out the option, and when goes above 200 day you date your options for shorter term like 2 month instead of 1-2 years.

Or perhaps historical implied volatility, since that impacts the price of options more. Marketchameleon has good numbers on historical implied volatility.
Marseille07
Posts: 11411
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

Mickelous wrote: Thu Jan 07, 2021 8:30 pm
Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
What if you constantly have a position in VIX, but you only roll the option further out when volatility is below a certain metric? Just determining what historical metric happens at least once every year or two where you can buy long dated options for. Maybe when it goes below the 200 day moving average you buy long dated options, and as long as it stays below that average you continue to roll out the option, and when goes above 200 day you date your options for shorter term like 2 month instead of 1-2 years.

Or perhaps historical implied volatility, since that impacts the price of options more. Marketchameleon has good numbers on historical implied volatility.
Sure, something like that *may* work. The only issue I see is that you're now timing your hedge, which is a bit counter-intuitive because hedging works when you always have it, not sometimes.
US & FM (5% seed) | 350K Cash
Mickelous
Posts: 198
Joined: Mon Apr 20, 2020 11:24 pm

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

Post by Mickelous »

Marseille07 wrote: Thu Jan 07, 2021 8:41 pm
Mickelous wrote: Thu Jan 07, 2021 8:30 pm
Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
What if you constantly have a position in VIX, but you only roll the option further out when volatility is below a certain metric? Just determining what historical metric happens at least once every year or two where you can buy long dated options for. Maybe when it goes below the 200 day moving average you buy long dated options, and as long as it stays below that average you continue to roll out the option, and when goes above 200 day you date your options for shorter term like 2 month instead of 1-2 years.

Or perhaps historical implied volatility, since that impacts the price of options more. Marketchameleon has good numbers on historical implied volatility.
Sure, something like that *may* work. The only issue I see is that you're now timing your hedge, which is a bit counter-intuitive because hedging works when you always have it, not sometimes.
You just buy longer dated hedges when it's relatively cheaper and when the options start to get expensive, either wait longer to roll them out or if you're getting near the end of the option buy a shorter dated call instead. It's just the matter of which volatility ETN do you choose to roll this with?
Marseille07
Posts: 11411
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

Mickelous wrote: Thu Jan 07, 2021 8:57 pm
Marseille07 wrote: Thu Jan 07, 2021 8:41 pm
Mickelous wrote: Thu Jan 07, 2021 8:30 pm
Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
What if you constantly have a position in VIX, but you only roll the option further out when volatility is below a certain metric? Just determining what historical metric happens at least once every year or two where you can buy long dated options for. Maybe when it goes below the 200 day moving average you buy long dated options, and as long as it stays below that average you continue to roll out the option, and when goes above 200 day you date your options for shorter term like 2 month instead of 1-2 years.

Or perhaps historical implied volatility, since that impacts the price of options more. Marketchameleon has good numbers on historical implied volatility.
Sure, something like that *may* work. The only issue I see is that you're now timing your hedge, which is a bit counter-intuitive because hedging works when you always have it, not sometimes.
You just buy longer dated hedges when it's relatively cheaper and when the options start to get expensive, either wait longer to roll them out or if you're getting near the end of the option buy a shorter dated call instead. It's just the matter of which volatility ETN do you choose to roll this with?
The options market is fairly efficient so any major ones should do, such as VXX / UVXY.
US & FM (5% seed) | 350K Cash
Marseille07
Posts: 11411
Joined: Fri Nov 06, 2020 1:41 pm

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

Post by Marseille07 »

Keep in mind that any hedging you add on likely reduces your CAGR. This is sort of like going 60/40 instead of 100/0 - safer portfolio but lower return.
US & FM (5% seed) | 350K Cash
Thereum
Posts: 66
Joined: Sun Jun 14, 2020 9:05 pm

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

Post by Thereum »

Shorting SQQQ continues to work brilliantly -- I'm already up 50% since I started in the summer. Long term US treasuries look very scary now, so I wouldn't keep the usual 50% in them. I am only at 20% in EDV.
perfectuncertainty
Posts: 370
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
Exactly!

You can monitor the trailing 5-day volatility of UPRO (currently 3.14% as of the close today) and when it's above 5% buy VIX calls (you'll pay up though) or exit until it is below 3.5% again.
perfectuncertainty
Posts: 370
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

Mickelous wrote: Thu Jan 07, 2021 8:57 pm
Marseille07 wrote: Thu Jan 07, 2021 8:41 pm
Mickelous wrote: Thu Jan 07, 2021 8:30 pm
Marseille07 wrote: Thu Jan 07, 2021 7:22 pm I do not recommend timing VIX spikes. Whatever instruments you use, the counterparty isn't stupid - they know what they're selling and demand premium accordingly, which you end up paying. The trade won't be as profitable as you think, even if you nail the spike.
What if you constantly have a position in VIX, but you only roll the option further out when volatility is below a certain metric? Just determining what historical metric happens at least once every year or two where you can buy long dated options for. Maybe when it goes below the 200 day moving average you buy long dated options, and as long as it stays below that average you continue to roll out the option, and when goes above 200 day you date your options for shorter term like 2 month instead of 1-2 years.

Or perhaps historical implied volatility, since that impacts the price of options more. Marketchameleon has good numbers on historical implied volatility.
Sure, something like that *may* work. The only issue I see is that you're now timing your hedge, which is a bit counter-intuitive because hedging works when you always have it, not sometimes.
You just buy longer dated hedges when it's relatively cheaper and when the options start to get expensive, either wait longer to roll them out or if you're getting near the end of the option buy a shorter dated call instead. It's just the matter of which volatility ETN do you choose to roll this with?
Longer dated VIX hedges don't work very well. Backwardation occurs quickly with the VIX. When the $hit hits the fan you want the front months.
perfectuncertainty
Posts: 370
Joined: Sun Feb 04, 2018 7:44 pm

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

Post by perfectuncertainty »

Timing TMF.

I have been quite content using the Daily Linear Regression Channel on Tradingview.com to buy and sell TMF. Sell near the top of the channel and buy at the bottom. Check it out: Full Screen

Image
hilink73
Posts: 582
Joined: Tue Sep 20, 2016 3:29 pm

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

Post by hilink73 »

perfectuncertainty wrote: Fri Jan 08, 2021 1:52 am Timing TMF.

I have been quite content using the Daily Linear Regression Channel on Tradingview.com to buy and sell TMF. Sell near the top of the channel and buy at the bottom. Check it out: Full Screen

Image
Interesting, although this seems more like trading than rebalancing a buy-and-hold approach.
Are you just gambling with TMF or how does that fit into the whole picture (including UPRO)?
Post Reply