HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by OohLaLa »

skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
It absolutely is. Everybody is courageous (or stupid :wink:) when it's hypothetical.

Before anybody gets the wrong idea, I am not thumping my chest and showing what a strong and fearless ape I am. My approach can end up blowing up in my face, in comparison to folks who were jumping ship over the past year.

To me, this year's posts really put on display just how differently people can interpret the same exact thread. There are those who thought this was being presented as a perfect strategy. Others saw the numerous warnings and exchanges about potential risks (temporary and permanent), and took them to heart, understanding what they are signing up for.

Some were giving the usual "if it's so easy to succeed with this, then why doesn't everybody do it?" HFEA is dead simple, but it's not easy to stick with, it doesn't fit the investing goals of every type of person or org, and has real risks of failing spectacularly (in comparison to more trad. AAs) within many people's investing horizons. These realities get burnt into many people's minds only when they materialize in person.
bgf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
I can recall several times coming across a snake while running/hiking and getting scared, heart rate immediately rises, senses sharpened, etc.

not much happens when i look at a picture of a snake.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

bgf wrote: Thu Sep 22, 2022 6:20 pm
skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
I can recall several times coming across a snake while running/hiking and getting scared, heart rate immediately rises, senses sharpened, etc.
not much happens when i look at a picture of a snake.
Did those trail snakes happen to rob you of half of your net worth, by any chance? :mrgreen:
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market timer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by market timer »

Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

market timer wrote: Thu Sep 22, 2022 10:42 pm Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
Stick to it, and don't forget to deleverage.
Which long bond futures did you buy, and why?
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market timer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by market timer »

comeinvest wrote: Thu Sep 22, 2022 10:50 pm
market timer wrote: Thu Sep 22, 2022 10:42 pm Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
Stick to it, and don't forget to deleverage.
Which long bond futures did you buy, and why?
I bought the ultra bond futures: https://www.cmegroup.com/trading/intere ... tures.html

The explanation I'm telling myself is that I'm locking in an interest rate on bond investments I'll make over the next several years with the 30-year above 3.6%, sort of pre-buying my investments.
er999
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by er999 »

market timer wrote: Thu Sep 22, 2022 10:42 pm Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
You should post a separate thread discussing this, a sequel to your epic thread from 2007, 15 years older and now hopefully wiser.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

market timer wrote: Thu Sep 22, 2022 11:08 pm
comeinvest wrote: Thu Sep 22, 2022 10:50 pm
market timer wrote: Thu Sep 22, 2022 10:42 pm Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
Stick to it, and don't forget to deleverage.
Which long bond futures did you buy, and why?
I bought the ultra bond futures: https://www.cmegroup.com/trading/intere ... tures.html

The explanation I'm telling myself is that I'm locking in an interest rate on bond investments I'll make over the next several years with the 30-year above 3.6%, sort of pre-buying my investments.
I'm sure you came across the mHFEA thread viewtopic.php?t=357281 , which makes convincing arguments for using ITT futures instead of LTT futures. You would be likewise locking in a similar rate, albeit for a shorter time, but which more capital, so it should be a wash in that respect. I'm curious why you still go with LTT (long-term treasuries).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
Correct, but we’re currently in a near 70% drawdown scenario with much more pain on and past the horizon. I’m happy to be out where I started, although I am down vs. having not played and just left everything in the total stock market. Another wound for me to lick. I’m convinced one of these days I’ll make money with my play money :oops:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Jags4186 wrote: Fri Sep 23, 2022 9:15 am
skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
Correct, but we’re currently in a near 70% drawdown scenario with much more pain on and past the horizon. I’m happy to be out where I started, although I am down vs. having not played and just left everything in the total stock market. Another wound for me to lick. I’m convinced one of these days I’ll make money with my play money :oops:
Why is there much more pain on the horizon? If so, should we not be shorting this strategy? Wouldn't much wealthier individuals and institutions with vastly more resources have already exploited such an obvious market mispricing? Food for thought.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

comeinvest wrote: Fri Sep 23, 2022 1:17 am
market timer wrote: Thu Sep 22, 2022 11:08 pm
comeinvest wrote: Thu Sep 22, 2022 10:50 pm
market timer wrote: Thu Sep 22, 2022 10:42 pm Icarus Theorem: Any popular thread on Bogleheads based on someone's exciting new leveraged investment approach is destined to melt down in time.

It is one thing to leverage when borrowing costs are near 0%. It is something entirely different when borrowing costs approach 5%. Will be interesting to see how many people stick with this strategy throughout the upcoming rate cycle.

For the record, I have recently started a version of this strategy, leveraging long bonds using futures. It is extremely uncomfortable at the moment.
Stick to it, and don't forget to deleverage.
Which long bond futures did you buy, and why?
I bought the ultra bond futures: https://www.cmegroup.com/trading/intere ... tures.html

The explanation I'm telling myself is that I'm locking in an interest rate on bond investments I'll make over the next several years with the 30-year above 3.6%, sort of pre-buying my investments.
I'm sure you came across the mHFEA thread viewtopic.php?t=357281 , which makes convincing arguments for using ITT futures instead of LTT futures. You would be likewise locking in a similar rate, albeit for a shorter time, but which more capital, so it should be a wash in that respect. I'm curious why you still go with LTT (long-term treasuries).
I am assuming it is related to the logic behind the LTT thread (liability matching). I don't think the logic for liability matching is really sound. If an investor holds stocks, clearly their risk tolerance is significantly greater than zero. And if their risk tolerance is greater than zero, they are not liability matching and they can tolerate some variance in final outcome. Liabilities cannot ever be truly known (inflation, unexpected expenses). A leverage unconstrained investor can improve the mean and reduce the variance with ITT. It is true that for leverage constrained investors there is a window where LTT makes sense. For the typical glidepath, for an investor under 55 with less than 30% bonds, the bonds should be LTT. But once the investor is older and/or the bond % rises above 30%, the bonds should be ITT and STT. Vineviz has some charts that show this glidepath nicely in that thread. If the investor is not leverage constrained and is comfortable with the use of futures, the bonds should be ITT.

If markettimer is truly just pre-buying LTT but does not intend to use leverage long-term, then buying the LTT now could make sense.
Jags4186
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

skierincolorado wrote: Fri Sep 23, 2022 9:41 am
Jags4186 wrote: Fri Sep 23, 2022 9:15 am
skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
Correct, but we’re currently in a near 70% drawdown scenario with much more pain on and past the horizon. I’m happy to be out where I started, although I am down vs. having not played and just left everything in the total stock market. Another wound for me to lick. I’m convinced one of these days I’ll make money with my play money :oops:
Why is there much more pain on the horizon? If so, should we not be shorting this strategy? Wouldn't much wealthier individuals and institutions with vastly more resources have already exploited such an obvious market mispricing? Food for thought.
As with all strategies it's easy to pick and enter a position but it's hard to know when to get out. One probably could do well shorting this strategy, but it's not easy to know when to bail and you may, like me, end up back where you started before you finally do.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
The same principle applies. If it is advantageous to pause buying HFEA, it's the same thing for the BH portfolio. But doing so is considered timing.
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bling
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

Marseille07 wrote: Fri Sep 23, 2022 11:59 am
bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
The same principle applies. If it is advantageous to pause buying HFEA, it's the same thing for the BH portfolio. But doing so is considered timing.
HFEA is quite a bit different than a regular BH portfolio though... the former relies on 3x leverage and quite a bit of negative correlation to balance each other out. the standard BH portfolio is the 3-fund which uses total bond and excludes LTTs.

i'll admit that i've been "market timing" the past year by contributing all income 100% to stocks only.

i have a small bit of play money allocated to a "HFEA-like" portfolio. instead of 3x leverage like UPRO/TMF i'm doing a very modest 1.5x leverage on margin. here, i'm conflicted. going 100% stocks doesn't feel right given that this strategy kind of relies on the negative correlation between stocks/bonds on leverage. but with rates going up, that is making stocks and bonds postiively correlated, which is very bad news. the rates are also making borrowing much more expensive now. 2-3 years ago when this strategy got popular, margin rates were in the low 1-1.5%. it's at 4-4.5% now.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

bling wrote: Fri Sep 23, 2022 12:25 pm HFEA is quite a bit different than a regular BH portfolio though... the former relies on 3x leverage and quite a bit of negative correlation to balance each other out. the standard BH portfolio is the 3-fund which uses total bond and excludes LTTs.

i'll admit that i've been "market timing" the past year by contributing all income 100% to stocks only.

i have a small bit of play money allocated to a "HFEA-like" portfolio. instead of 3x leverage like UPRO/TMF i'm doing a very modest 1.5x leverage on margin. here, i'm conflicted. going 100% stocks doesn't feel right given that this strategy kind of relies on the negative correlation between stocks/bonds on leverage. but with rates going up, that is making stocks and bonds postiively correlated, which is very bad news. the rates are also making borrowing much more expensive now. 2-3 years ago when this strategy got popular, margin rates were in the low 1-1.5%. it's at 4-4.5% now.
Imo BH portfolio also relies on negative correlation. If that's not the case, why not just hold stocks and cash?

I think your strategy of buying stocks only is fine, provided the yields go up from here. I wouldn't recommend using margin though; we have levered instruments instead.
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bling
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

Marseille07 wrote: Fri Sep 23, 2022 12:30 pm Imo BH portfolio also relies on negative correlation. If that's not the case, why not just hold stocks and cash?
i think some would say bonds are here to reduce violility of the stock portion so that you can stay the course. bonds have higher expected return than cash, so...yeah. it's really hard to discuss this though because sooner or later you start talking about whether cash/EF is part of your portfolio and there are wildly different opinions on that.
Marseille07 wrote: Fri Sep 23, 2022 12:30 pm I wouldn't recommend using margin though; we have levered instruments instead.
borrowing costs don't disappear just because leveraged instruments are used. LETFs can also have weird behavior given they reset daily. in flat markets LETFs lose vs 1x underlier.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

bling wrote: Fri Sep 23, 2022 12:56 pm
Marseille07 wrote: Fri Sep 23, 2022 12:30 pm I wouldn't recommend using margin though; we have levered instruments instead.
borrowing costs don't disappear just because leveraged instruments are used. LETFs can also have weird behavior given they reset daily. in flat markets LETFs lose vs 1x underlier.
Margin rates are too high and I would never use. Use a box spread, futures, or letf (with letf you can fight the daily leverage reset by buying more upro when the market drops 10% and selling when it gains 10%).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

bling wrote: Fri Sep 23, 2022 12:25 pm
Marseille07 wrote: Fri Sep 23, 2022 11:59 am
bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
The same principle applies. If it is advantageous to pause buying HFEA, it's the same thing for the BH portfolio. But doing so is considered timing.
HFEA is quite a bit different than a regular BH portfolio though... the former relies on 3x leverage and quite a bit of negative correlation to balance each other out. the standard BH portfolio is the 3-fund which uses total bond and excludes LTTs.

i'll admit that i've been "market timing" the past year by contributing all income 100% to stocks only.

i have a small bit of play money allocated to a "HFEA-like" portfolio. instead of 3x leverage like UPRO/TMF i'm doing a very modest 1.5x leverage on margin. here, i'm conflicted. going 100% stocks doesn't feel right given that this strategy kind of relies on the negative correlation between stocks/bonds on leverage. but with rates going up, that is making stocks and bonds postiively correlated, which is very bad news. the rates are also making borrowing much more expensive now. 2-3 years ago when this strategy got popular, margin rates were in the low 1-1.5%. it's at 4-4.5% now.
I would not say that hfea relies on a negative correlation. The correlation has not been negative historically it has been near zero. Low/negative correlation is nice and helps to reduce volatility and volatility decay of highly leveraged portfolios. But it is far more essential that the portfolio components simply have positive expected returns. The expected return for stocks and bonds is positive. The expected return is higher than it was a year ago. While I have some issues with hfea specifically (as outlined in some of my posts above), one should own at least as much stocks and bonds as a year ago - if not more due to the higher expected returns.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

skierincolorado wrote: Fri Sep 23, 2022 1:01 pm
bling wrote: Fri Sep 23, 2022 12:56 pm
Marseille07 wrote: Fri Sep 23, 2022 12:30 pm I wouldn't recommend using margin though; we have levered instruments instead.
borrowing costs don't disappear just because leveraged instruments are used. LETFs can also have weird behavior given they reset daily. in flat markets LETFs lose vs 1x underlier.
Margin rates are too high and I would never use. Use a box spread, futures, or letf (with letf you can fight the daily leverage reset by buying more upro when the market drops 10% and selling when it gains 10%).
to be clear, i'm borrowing with IBKR which has very competitive rates. i'd never do this with any other broker.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

bling wrote: Fri Sep 23, 2022 1:08 pm
skierincolorado wrote: Fri Sep 23, 2022 1:01 pm
bling wrote: Fri Sep 23, 2022 12:56 pm
Marseille07 wrote: Fri Sep 23, 2022 12:30 pm I wouldn't recommend using margin though; we have levered instruments instead.
borrowing costs don't disappear just because leveraged instruments are used. LETFs can also have weird behavior given they reset daily. in flat markets LETFs lose vs 1x underlier.
Margin rates are too high and I would never use. Use a box spread, futures, or letf (with letf you can fight the daily leverage reset by buying more upro when the market drops 10% and selling when it gains 10%).
to be clear, i'm borrowing with IBKR which has very competitive rates. i'd never do this with any other broker.
Even ibkr pro is benchmark +1.5%. That's almost half the equity risk premium so they are capturing nearly half of your expected return from borrowing to invest. And that's if your leverage is modest and you never rebalance/sell/experience volatility decay. If you are rebalancing to a target leverage and therefore incurring some volatility decay they could be capturing nearly all of your expected return.

Try simulating leverage in a more typical market (not the u.s. 40 year bull market) with borrowing costs 1.5% above benchmark... the results are not pretty.

With box spreads, futures and letf you should get costs .3-.5% above benchmark.

People wisely go to great lengths to avoid a few tenths of a percent in etf fees. This is much larger, and it becomes even more critical with leverage.

I could see using margin for a few years very early in investing career but otherwise no.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

skierincolorado wrote: Fri Sep 23, 2022 1:38 pm Even ibkr pro is benchmark +1.5%. That's almost half the equity risk premium so they are capturing nearly half of your expected return from borrowing to invest. And that's if your leverage is modest and you never rebalance/sell/experience volatility decay. If you are rebalancing to a target leverage and therefore incurring some volatility decay they could be capturing nearly all of your expected return.

Try simulating leverage in a more typical market (not the u.s. 40 year bull market) with borrowing costs 1.5% above benchmark... the results are not pretty.

With box spreads, futures and letf you should get costs .3-.5% above benchmark.
i didn't want to deal with the complexities of rolling options/futures and IBKR's rate was good enough for this experiment. box spreads are trading at 4% right now for 1 year out, which is "only" 0.5% more than IBKR.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

bling wrote: Fri Sep 23, 2022 1:51 pm
skierincolorado wrote: Fri Sep 23, 2022 1:38 pm Even ibkr pro is benchmark +1.5%. That's almost half the equity risk premium so they are capturing nearly half of your expected return from borrowing to invest. And that's if your leverage is modest and you never rebalance/sell/experience volatility decay. If you are rebalancing to a target leverage and therefore incurring some volatility decay they could be capturing nearly all of your expected return.

Try simulating leverage in a more typical market (not the u.s. 40 year bull market) with borrowing costs 1.5% above benchmark... the results are not pretty.

With box spreads, futures and letf you should get costs .3-.5% above benchmark.
i didn't want to deal with the complexities of rolling options/futures and IBKR's rate was good enough for this experiment. box spreads are trading at 4% right now for 1 year out, which is "only" 0.5% more than IBKR.
Ibkr pro will hit 5.5%- 6% by December and over 6% next year unless the fed completely reverses course. Locking in 4% is a great deal

I agree if you are doing small amounts relative to future income/savings (basically you are tempelorarily prebuying by a few years to reduce sequence of return risk and will soon pay back the loan), margin is good enough... but it is definitely not worth it long term
Last edited by skierincolorado on Fri Sep 23, 2022 2:01 pm, edited 4 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

bling wrote: Fri Sep 23, 2022 12:56 pm i think some would say bonds are here to reduce violility of the stock portion so that you can stay the course. bonds have higher expected return than cash, so...yeah. it's really hard to discuss this though because sooner or later you start talking about whether cash/EF is part of your portfolio and there are wildly different opinions on that.
Bonds are less volatile than stocks, but imo the big part of holding bonds is to expect negative correlation during "normal times" if you will.

Obviously if we run into a year like 2022, in which stocks & bonds go down together, being less volatile doesn't help a whole lot.
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CletusCaddy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CletusCaddy »

bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
I’ve pointed this out elsewhere. The correlation between stocks and LTTs is currently zero, not positive. Of course that is still an increase from the negative correlation from recent past.

Until the correlation turns consistently positive, I would say the HFEA thesis remains sound
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bling »

CletusCaddy wrote: Fri Sep 23, 2022 2:19 pm
bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
I’ve pointed this out elsewhere. The correlation between stocks and LTTs is currently zero, not positive. Of course that is still an increase from the negative correlation from recent past.

Until the correlation turns consistently positive, I would say the HFEA thesis remains sound
how'd you arrive at zero correlation? YTD is UPRO -57%, TMF -66%. granted, this is a very short duration, but it's totally within the realm of possibility for us to see another 50% drop of both UPRO and TMF in the next couple months and at that point you've lost so much money it doesn't matter what "the long run" says.
Logan Roy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Logan Roy »

skierincolorado wrote: Fri Sep 23, 2022 9:41 am
Jags4186 wrote: Fri Sep 23, 2022 9:15 am
skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
Correct, but we’re currently in a near 70% drawdown scenario with much more pain on and past the horizon. I’m happy to be out where I started, although I am down vs. having not played and just left everything in the total stock market. Another wound for me to lick. I’m convinced one of these days I’ll make money with my play money :oops:
Why is there much more pain on the horizon? If so, should we not be shorting this strategy? Wouldn't much wealthier individuals and institutions with vastly more resources have already exploited such an obvious market mispricing? Food for thought.
Lots of hedge funds – I think from Bridgewater to Brevan Howard – have been effectively shorting this strategy.

I think what it really needed was a proper way to offset the risk to stocks, because no one knows how low things might go (rates had to reach >15% to cool comparable levels of inflation in the 70s – if we include house prices in our figure). So while stocks are infinite duration, and vulnerable to inflation/hikes/recession, you probably needed short-duration TIPS to protect them, and long duration TIPS to profit from dislocations.

There's a whole lot of market data from before the 1970s that may be more relevant to where we find ourselves now (huge debt, low rates, rising inflation).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

bling wrote: Fri Sep 23, 2022 2:31 pm
CletusCaddy wrote: Fri Sep 23, 2022 2:19 pm
bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
I’ve pointed this out elsewhere. The correlation between stocks and LTTs is currently zero, not positive. Of course that is still an increase from the negative correlation from recent past.

Until the correlation turns consistently positive, I would say the HFEA thesis remains sound
how'd you arrive at zero correlation? YTD is UPRO -57%, TMF -66%. granted, this is a very short duration, but it's totally within the realm of possibility for us to see another 50% drop of both UPRO and TMF in the next couple months and at that point you've lost so much money it doesn't matter what "the long run" says.
From inception to 2021 both tmf and upro were up huge. That's also a positive correlation. It depends if we are talking about the correlation of daily, monthly, annual, or decades returns. Each can be quite different. The correlation of monthly returns is probably the most important since it is feasible to rebalance monthly and large drawdowns tend to happen on the scale of months... not days. That said... I think the monthly correlation of returns is still pretty low.

Far too much attention is paid to the correlation. It is far more important that the returns be positive. Low or negative correlation is a nice side benefit but not essential. The correlation could be 1.0 and there would be no problem as long as the returns were reasonably positive.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CletusCaddy »

bling wrote: Fri Sep 23, 2022 2:31 pm
CletusCaddy wrote: Fri Sep 23, 2022 2:19 pm
bling wrote: Fri Sep 23, 2022 11:52 am the standard BH response to a market downturn is to hold and buy more. how does that apply here? it's looking pretty bad this year. and with rates increasing it looks like we're going to continue having positive correlation between stocks and bonds.
I’ve pointed this out elsewhere. The correlation between stocks and LTTs is currently zero, not positive. Of course that is still an increase from the negative correlation from recent past.

Until the correlation turns consistently positive, I would say the HFEA thesis remains sound
how'd you arrive at zero correlation? YTD is UPRO -57%, TMF -66%. granted, this is a very short duration, but it's totally within the realm of possibility for us to see another 50% drop of both UPRO and TMF in the next couple months and at that point you've lost so much money it doesn't matter what "the long run" says.
That is not the right way to measure correlation
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

skierincolorado wrote: Fri Sep 23, 2022 2:36 pm From inception to 2021 both tmf and upro were up huge. That's also a positive correlation. It depends if we are talking about the correlation of daily, monthly, annual, or decades returns. Each can be quite different. The correlation of monthly returns is probably the most important since it is feasible to rebalance monthly and large drawdowns tend to happen on the scale of months... not days. That said... I think the monthly correlation of returns is still pretty low.

Far too much attention is paid to the correlation. It is far more important that the returns be positive. Low or negative correlation is a nice side benefit but not essential. The correlation could be 1.0 and there would be no problem as long as the returns were reasonably positive.
It's quite intriguing that you and I disagree on pretty much everything :-D It's OK though, different perspectives.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 2:43 pm
skierincolorado wrote: Fri Sep 23, 2022 2:36 pm From inception to 2021 both tmf and upro were up huge. That's also a positive correlation. It depends if we are talking about the correlation of daily, monthly, annual, or decades returns. Each can be quite different. The correlation of monthly returns is probably the most important since it is feasible to rebalance monthly and large drawdowns tend to happen on the scale of months... not days. That said... I think the monthly correlation of returns is still pretty low.

Far too much attention is paid to the correlation. It is far more important that the returns be positive. Low or negative correlation is a nice side benefit but not essential. The correlation could be 1.0 and there would be no problem as long as the returns were reasonably positive.
It's quite intriguing that you and I disagree on pretty much everything :-D It's OK though, different perspectives.
I don't think we disagree on that much, just some of the subtler points.

It's a mathematical fact that the direction of returns are thr more significant factor.

Two assets with expected returns of -5% with negative correlation will yield negative returns (unless the correlation is extremely negative and there is a ton of volatility)

Two assets with expected returns of +5% with positive correlation will yield positive returns.

Owning 100% upro since 1955 is not that much worse than HFEA.

mHFEA dramatically outperforms HFEA not because the correlations are any different but because the returns from ITT are much higher per unit of risk
Last edited by skierincolorado on Fri Sep 23, 2022 2:52 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

skierincolorado wrote: Fri Sep 23, 2022 2:48 pm It's a mathematical fact that the direction of returns are thr more significant factor.

Two assets with expected returns of -5% with negative correlation will yield negative returns.

Two assets with expected returns of +5% with positive correlation will yield positive returns.

Owning 100% upro since 1955 is not that much worse than HFEA.
Wait...you're saying HFEA would have done better than 100% UPRO since 1955? What if you were 100% TMF since 1955 then?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 2:50 pm
skierincolorado wrote: Fri Sep 23, 2022 2:48 pm It's a mathematical fact that the direction of returns are thr more significant factor.

Two assets with expected returns of -5% with negative correlation will yield negative returns.

Two assets with expected returns of +5% with positive correlation will yield positive returns.

Owning 100% upro since 1955 is not that much worse than HFEA.
Wait...you're saying HFEA would have done better than 100% UPRO since 1955? What if you were 100% TMF since 1955 then?
I mean certainly on a risk adjusted basis. Not sure about cagr... would have to check spreadsheets at home. TMF would have very positive return. If it didn't HFEA fails. mHFEA outperforms HFEA not because the correlations are different but because ITT dramatically outperform LTT.

It's all about the performance of the assets individually... the low correlations are a nice side benefit.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

skierincolorado wrote: Fri Sep 23, 2022 2:54 pm I mean certainly on a risk adjusted basis. Not sure about cagr... would have to check spreadsheets at home. TMF would have very positive return. If it didn't HFEA fails. mHFEA outperforms HFEA not because the correlations are different but because ITT dramatically outperform LTT.

It's all about the performance of the assets individually... the low correlations are a nice side benefit.
Interesting, I wasn't aware ITT outperforms LTT...I wonder why that is, since the coupon rate is generally higher for LTTs.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 2:56 pm
skierincolorado wrote: Fri Sep 23, 2022 2:54 pm I mean certainly on a risk adjusted basis. Not sure about cagr... would have to check spreadsheets at home. TMF would have very positive return. If it didn't HFEA fails. mHFEA outperforms HFEA not because the correlations are different but because ITT dramatically outperform LTT.

It's all about the performance of the assets individually... the low correlations are a nice side benefit.
Interesting, I wasn't aware ITT outperforms LTT...I wonder why that is, since the coupon rate is generally higher for LTTs.
I should clarify I mean on a risk adjusted basis. You can own 2-3x more ITT with less interest risk since thr duration is 1/4th. But since the coupons are not 1/4th (more like 3/4ths) you are getting far more coupons/carry/return.

So for example those of us in various versions of mHFEA are down less than HFEA even though the strategy had much higher long term returns. More return but less risk.
Last edited by skierincolorado on Fri Sep 23, 2022 3:03 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

skierincolorado wrote: Fri Sep 23, 2022 3:01 pm I should clarify I mean on a risk adjusted basis. You can own 2-3x more ITT with less interest risk since thr duration is 1/4th. But since the coupons are not 1/4th (more like 3/4ths) you are getting far more coupons/carry/return.
This makes sense, thanks for the clarification.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheDoctor91 »

The current drawdown for HFEA at the original allocation (40/60) is worse than 2008.

I usually backtest a 50/50 allocation and that is now worse than 2008.

I guess all that's left is for the 55/45 to get blown.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by randyharris »

skierincolorado wrote: Thu Sep 22, 2022 2:57 pm Honestly surprised anybody would have a change of heart based on the performance... hfea drew down over 50% in 1974 1982 2001 and 2009. I guess seeing is believing
It is one thing to see a backtest with big drawdowns when it results in great overall performance over the years; it is an entirely different thing to experience 60% drawdowns first hand.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LTCM »

TheDoctor91 wrote: Fri Sep 23, 2022 3:03 pm The current drawdown for HFEA at the original allocation (40/60) is worse than 2008.

I usually backtest a 50/50 allocation and that is now worse than 2008.

I guess all that's left is for the 55/45 to get blown.
These drawdowns have me ready to pile in.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

LTCM wrote: Fri Sep 23, 2022 3:59 pm
TheDoctor91 wrote: Fri Sep 23, 2022 3:03 pm The current drawdown for HFEA at the original allocation (40/60) is worse than 2008.

I usually backtest a 50/50 allocation and that is now worse than 2008.

I guess all that's left is for the 55/45 to get blown.
These drawdowns have me ready to pile in.
I itch to pile in. Is there something in particular you're waiting for?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Fri Sep 23, 2022 4:01 pm I itch to pile in. Is there something in particular you're waiting for?
Buddy, please. You're on the right track to stay out of it until 20Y > FFR terminal rate expectations.

This wouldn't be my strategy but it is a reasonable one.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Marseille07 wrote: Fri Sep 23, 2022 4:03 pm
Tamalak wrote: Fri Sep 23, 2022 4:01 pm I itch to pile in. Is there something in particular you're waiting for?
Buddy, please. You're on the right track to stay out of it until 20Y > FFR terminal rate expectations.

This wouldn't be my strategy but it is a reasonable one.
Don't worry, that's one (of several) requirements before I try it, I was just asking :twisted:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by truckdriver8 »

Is it a good time to sell TMF until interest rates are lowered? We know rates will probably keep increasing through 2023, so is it better to allocate that money elsewhere?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

truckdriver8 wrote: Fri Sep 23, 2022 4:22 pm Is it a good time to sell TMF until interest rates are lowered? We know rates will probably keep increasing through 2023, so is it better to allocate that money elsewhere?
That's a difficult question. Imo yes, but this place does not believe in bond market timing and not the best place to discuss that.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 4:33 pm
truckdriver8 wrote: Fri Sep 23, 2022 4:22 pm Is it a good time to sell TMF until interest rates are lowered? We know rates will probably keep increasing through 2023, so is it better to allocate that money elsewhere?
That's a difficult question. Imo yes, but his place does not believe in bond market timing and not the best place to discuss that.
Haha, have I partially convinced you or just ground you down into avoiding the subject? :beer

I've enjoyed the discussion. The rate increases across the curve have been remarkable although I still believe they are due to upside surprises in inflation and shifts in fed policy, not an inherent result of ffr increases.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

truckdriver8 wrote: Fri Sep 23, 2022 4:22 pm Is it a good time to sell TMF until interest rates are lowered? We know rates will probably keep increasing through 2023, so is it better to allocate that money elsewhere?
If Marseille07 didn't make it obvious, most here including myself would say not to time the market. Expected ffr increases are already built into tmf. Unless the fed announces even more ffr increases than already planned, tmf will make money over the next few months and years.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 4:03 pm
Tamalak wrote: Fri Sep 23, 2022 4:01 pm I itch to pile in. Is there something in particular you're waiting for?
Buddy, please. You're on the right track to stay out of it until 20Y > FFR terminal rate expectations.

This wouldn't be my strategy but it is a reasonable one.

How do you define terminal? Both the fed and the market expect ffr of 2.5% in 2025 which is the terminus of their dot plot. The 20y is already substantially above that.

Why would the 20y ever be priced with a yield far higher than expected ffr over the next 20 years?
Last edited by skierincolorado on Fri Sep 23, 2022 6:32 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

skierincolorado wrote: Fri Sep 23, 2022 1:05 pm I would not say that hfea relies on a negative correlation. The correlation has not been negative historically it has been near zero. Low/negative correlation is nice and helps to reduce volatility and volatility decay of highly leveraged portfolios. But it is far more essential that the portfolio components simply have positive expected returns. The expected return for stocks and bonds is positive. The expected return is higher than it was a year ago. While I have some issues with hfea specifically (as outlined in some of my posts above), one should own at least as much stocks and bonds as a year ago - if not more due to the higher expected returns.
It's a slippery slope. As I outlined a few times in the mHFEA thread, I feel there is little to no theoretical justification that the term premium should be positive in the long run; and all models forecast a zero or negative term premium, and the models e.g. ACM didn't budge even when interest rates rose dramatically in 2022. I too feel that a 3.5% 10y looks "safer" for (m)HFEA than a 1.5y 10y yield. But is it true?

Copying from the long term bond thread

The CPI 1964 to ca. 1980 looks not much different from 2021-2022, despite the fact that interest rates were several percentage points above inflation during 1964 to ca. 1978. After 1964, rates did not fall below 4% again until ca. 2008 - that's 44 years! That would suggest to NOT go by the current yield when determining your treasury allocation, hoping for it to fall ("mean-revert") - because it may not.

Image

Interesting, when 5y rates were at 5% in 2007, the estimated term premium was zero (probably because of the 44 year recent history of high short-term rates at that time). In 2009 after a significant drop of the 5y from ca. 5% to ca. 2%, the estimates were at ca. 2%. Because the short-term rates were even lower (0%) and I guess it was implied in the curve that they would stay that way for a while EDIT: It was actually implied that they would rise again soon (see third image below) - so why was the expected term premium so high? (I guess the term structure implied higher rates, but that didn't affect expected returns of current bonds back then as the hikes were expected.) VGIT performance was about flat, see last image below. So ITT futures would probably have had negative returns in the 5-year period starting 2009 (chart performance + interest distributions from the fund - financing cost).
That would suggest going by the current yield, NOT by term premia model forecasts, wouldn't it?

Image

Image

Image

Image
Last edited by comeinvest on Fri Sep 23, 2022 6:51 pm, edited 15 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

skierincolorado wrote: Fri Sep 23, 2022 6:25 pm Haha, have I partially convinced you or just ground you down into avoiding the subject? :beer

I've enjoyed the discussion. The rate increases across the curve have been remarkable although I still believe they are due to upside surprises in inflation and shifts in fed policy, not an inherent result of ffr increases.
Quite the contrary, you know my calls and they take a while to manifest. The yield curve is trending toward my direction. We can certainly discuss then but not right now, not on this thread.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Marseille07 wrote: Fri Sep 23, 2022 6:32 pm
skierincolorado wrote: Fri Sep 23, 2022 6:25 pm Haha, have I partially convinced you or just ground you down into avoiding the subject? :beer

I've enjoyed the discussion. The rate increases across the curve have been remarkable although I still believe they are due to upside surprises in inflation and shifts in fed policy, not an inherent result of ffr increases.
Quite the contrary, you know my calls and they take a while to manifest. The yield curve is trending toward my direction. We can certainly discuss then but not right now, not on this thread.
Well as you know I don't think most here would care how high yields got ... it would not prove the hypothesis and would be attributed to other macro factors like inflation being higher than expected yet again

I'd already concede your call from 6ish months ago was a little closer to reality than my (the market's) expectation, but it's right for the wrong reasons. Inflation was higher than expected and the fed shifted current and planned policy. 6 months ago they were still saying quarter point hikes lol
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