Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

[skierincolorado]

. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds,

Since you posted this 2 year interest rates fell from a high of 5.1% to a brief low of 3.8%. Currently at 4.35%. Huge money to be made. Stocks down. My IB account is up 20%. I don't mean to troll, just to make the point that the market works in unexpected ways. Don't try to predict it. Things could go either way from here. Maybe this is just the beginning of banking sector implosion and rate decreases, maybe things settle down. Again I don't think there is a problem with holding limited or no bonds, but there could be a problem with an attempt to dynamically time them. Not suggesting you add more bonds at this point, unless its part of a long term plan. Just the big picture of market timing.

[Chocolatebar]

Huge money to be made.

What do you mean?

Stocks down. My IB account is up 20%. I don't mean to troll, just to make the point that the market works in unexpected ways. Don't try to predict it.

How am I doing that?

Things could go either way from here. Maybe this is just the beginning of banking sector implosion and rate decreases, maybe things settle down. Again I don't think there is a problem with holding limited or no bonds, but there could be a problem with an attempt to dynamically time them. Not suggesting you add more bonds at this point, unless its part of a long term plan. Just the big picture of market timing.

I feel like you missed the post where I explained that I'm not timing my asset allocation. I'm simply adjusting it as my net worth changes, which is what everyone else does. When it increases significantly - I should carry more bonds and less stocks. When it dramatically decreases via market crash - I should load up on stocks.

If you disagree with this then it's totally fine. I concede that everyone else in this thread is more educated than I am when it comes to investing. If you have a recommendation for what I should do instead then I'd love to hear it. The problem with my strategy at this point is that I'm limited until I'm comfortable utilizing futures and box spreads.

BTW - my daughter was born a few days ago and everyone is happy and healthy. Proud papa here

[comeinvest]

I'm mildly confused reconciling the data sources of LIBOR and Term SOFR, can somebody please help?
For 03/13, we have SOFR at 4.80 here https://www.traditiondata.com/americas/us-sofr/



and 4.73 here https://www.theice.com/iba/term-rates



But CME says it was 5.03 https://www.cmegroup.com/trading/equity ... /main.html



And ICE has LIBOR at 5.18 https://www.theice.com/pace-of-roll/MSC ... 7-20230616 (although it's 4.87 according to the ICE link in the pic above https://www.theice.com/iba/term-rates)



but it was 4.87 according to here https://www.global-rates.com/en/interes ... libor.aspx



Which one is right? Slightly different reference times perhaps if they don't take end of day values, but still?

[comeinvest]

. My logic for 90/10 stock/bonds is basically that since the market is currently down, I don't need as many bonds,

Since you posted this 2 year interest rates fell from a high of 5.1% to a brief low of 3.8%. Currently at 4.35%. Huge money to be made. Stocks down. My IB account is up 20%. I don't mean to troll, just to make the point that the market works in unexpected ways. Don't try to predict it. Things could go either way from here. Maybe this is just the beginning of banking sector implosion and rate decreases, maybe things settle down. Again I don't think there is a problem with holding limited or no bonds, but there could be a problem with an attempt to dynamically time them. Not suggesting you add more bonds at this point, unless its part of a long term plan. Just the big picture of market timing.

The S&P500 is 2.4% down, VGIT (duration 5.2 years) is 2.2% up over the last 5 days to right now. For whoever had about equal amounts of equities and ITT, the portfolio value didn't change much. Whoever had STT or short maturity SOFR futures in equivalent amounts, had an overall gain. The short-term rates dropped fastest.

I use tax-exempt municipal bond closed-end funds in my taxable account. The index ETFs VTEB and MUB both rose about 1% during the last 5 days. Not quite as fast as treasuries.
I use municipal bonds with long maturities, which have much higher after-tax term premium and yield spread to risk-free rates than treasuries. VWLTX (Vanguard Long-Term Tax-Exempt Fund) and VCITX (Vanguard California Long-Term Tax-Exempt Fund) rose about 1.5% over the last week i.e. from 03/06 to yesterday 03/13. For comparison, VUSTX (Vanguard Long-Term Treasury Fund) rose about 4% in the same timeframe. VGLT (Vanguard Long-Term Treasury Index ETF) rose about 4.5% until yesterday, but dropped 1.5% today, for a total gain of 2% over the last 5 days until now.
The NAV of BFZ and EVM (leveraged California municipal bonds) rose about 2.5% between 03/06 and 03/13.

For comparison, VCLT (Vanguard Long-Term Corporate Bond fund) rose about 0.5% during the last 5 days.

The popular managed futures ETFs KMLM and DBMF which worked so nicely last year when everything else fell, had -3% and -4% performance over the last 5 days, respectively.

But not every crisis is equal. In March 2020, municipal bonds dropped first before they rose, and even treasuries exhibited erratic behavior momentarily, if I remember right.

[skierincolorado]

Huge money to be made.

What do you mean?

Stocks down. My IB account is up 20%. I don't mean to troll, just to make the point that the market works in unexpected ways. Don't try to predict it.

How am I doing that?

Things could go either way from here. Maybe this is just the beginning of banking sector implosion and rate decreases, maybe things settle down. Again I don't think there is a problem with holding limited or no bonds, but there could be a problem with an attempt to dynamically time them. Not suggesting you add more bonds at this point, unless its part of a long term plan. Just the big picture of market timing.

I feel like you missed the post where I explained that I'm not timing my asset allocation. I'm simply adjusting it as my net worth changes, which is what everyone else does. When it increases significantly - I should carry more bonds and less stocks. When it dramatically decreases via market crash - I should load up on stocks.

If you disagree with this then it's totally fine. I concede that everyone else in this thread is more educated than I am when it comes to investing. If you have a recommendation for what I should do instead then I'd love to hear it. The problem with my strategy at this point is that I'm limited until I'm comfortable utilizing futures and box spreads.

BTW - my daughter was born a few days ago and everyone is happy and healthy. Proud papa here

Congratulations! Will read your other post and respond when I can.

[comeinvest]

I would say the reference interest rates on the CME page are definitely not reliable. The 5.03% 3M SOFR on 03/13 same as on 03/10 doesn't match the SOFR future movement. I think this Mar 2023 SOFR futures contract should closely match the financing period of the CME equity futures expiring in June. Fair enough, they make the SOFR rate field editable; but why don't they put in the correct rate?!

[comeinvest]

On 03/13 the difference of S&P 400 and S&P 500 implied rate widened again to a relatively typical 0.41%.
It looks like I lucked out and got and additional 8.5 bps with my fills, locking in a 0.495% p.a. spread difference with my offsetting equity futures pair for the next quarter, if my math is right.

[comeinvest]

On the ICE site it looks like the MXEF (MME) futures roll cheapened on 03/13; but their reference rates are off; perhaps they take beginning of day values? Rates decreased about 0.2% on average vs the prior day, and 3M SOFR was more like 4.8% on average during the day, making the spread to SOFR on 03/13 about 0.9%. I had a standing limit order while rates were crushing, and paid even more. The MSCI EAFE futures roll was about equally expensive. Not fun.

[comeinvest]

Nikkei futures in JPY provide cheap implied financing at about 0.15% above the risk-free rate / government bonds.

I'm not sure what exactly my exposure to volatilities would be if I were to use USD based quanto Nikkei futures, which might become relevant for collateral management when the JPY short-term interest rates rise measurably above zero.

[comeinvest]

A fantastic correlation regime change occurred around March 6th. Look at that precision in the second chart.

[skierincolorado]

On 03/13 the difference of S&P 400 and S&P 500 implied rate widened again to a relatively typical 0.41%.
It looks like I lucked out and got and additional 8.5 bps with my fills, locking in a 0.495% p.a. spread difference with my offsetting equity futures pair for the next quarter, if my math is right.

Did you see they will have a micro mid cap starting March 20th? I am curious what the implied rate will be. If I understand, emd is 250k per contract which I don't quite have enough for. I'm getting close but I'm also hesitant to switch 250k straight from MES to EMD all at once.

[skierincolorado]

On the ICE site it looks like the MXEF (MME) futures roll cheapened on 03/13; but their reference rates are off; perhaps they take beginning of day values? Rates decreased about 0.2% on average vs the prior day, and 3M SOFR was more like 4.8% on average during the day, making the spread to SOFR on 03/13 about 0.9%. I had a standing limit order while rates were crushing, and paid even more. The MSCI EAFE futures roll was about equally expensive. Not fun.

Wow expensive. Why buy msci futures at all? I might buy just 1 mxef for diversification and dollar hedging.

[skierincolorado]

A fantastic correlation regime change occurred around March 6th. Look at that precision in the second chart.

It's been fun for sure. Wild market moves and my accounts hold steady overall (bond heavy accounts are up). I've been taking the opportunity to heavily rebalance the cash proceeds from treasury futures into equities.

[comeinvest]

Did you see they will have a micro mid cap starting March 20th? I am curious what the implied rate will be. If I understand, emd is 250k per contract which I don't quite have enough for. I'm getting close but I'm also hesitant to switch 250k straight from MES to EMD all at once.

Good news. I'm surprised, because the /EMD itself is not that liquid. (The calendar rolls are efficient though, which matters to us investors.)
My guess is that the micro midcap will mimic the /EMD accurately and even the bid/ask spread will be similar, because traders and market makers will arbitrage the two. So good news.
I am pocketing ca. 0.4% p.a. from my large cap / mid cap index arbitrage pair trade based on the difference in implied rates. I certainly have some industry concentration that way namely underexposure to big tech, which will result in some fluctuations; but the risk of the pair trade should be random i.e. totally uncorrelated to any other markets, with 0.4% p.a. expected excess return. In my other account I hedge the mid cap / large cap divergence risk with a large cap / mid cap / small cap offset. Theoretically the short Russell 2000 offset position should add to my market-neutral overlay returns in the long run, if the rumor materializes that the Russell is trash because of structural issues.

You will probably need to ask IB to add the micro via a web ticket, if you want to have it fast.

[comeinvest]

Wow expensive. Why buy msci futures at all? I might buy just 1 mxef for diversification and dollar hedging.

What is the alternative? My asset allocation is about world market cap, for maximal diversification benefits.
I think the DJ600 futures have less implied financing, but more collateral drag.
For emerging markets, you would have a drag of about 0.4% p.a. from dividend withholding if you implement the exposure without futures, that you have to net with the futures implied financing cost. That is before U.S. tax; in taxable accounts the situation is more complicated.
Options box spread currently have ca 0.3% financing spread above T-bills. In IRAs you can't use options box spreads; it is not clear if options box spreads result in unrelated business taxable income in 401(k) accounts.

I look at the puzzle as a "portable alpha" optimization problem - implement via outright equities or ETFs whatever has the maximum alpha vs the index implemented with futures; implement the rest of the asset allocation with futures to achieve your targets.

[skierincolorado]

Wow expensive. Why buy msci futures at all? I might buy just 1 mxef for diversification and dollar hedging.

What is the alternative? My asset allocation is about world market cap, for maximal diversification benefits.
I think the DJ600 futures have less implied financing, but more collateral drag.
For emerging markets, you would have a drag of about 0.4% p.a. from dividend withholding if you implement the exposure without futures, that you have to net with the futures implied financing cost. That is before U.S. tax; in taxable accounts the situation is more complicated.
Options box spread currently have ca 0.3% financing spread above T-bills. In IRAs you can't use options box spreads; it is not clear if options box spreads result in unrelated business taxable income in 401(k) accounts.

I look at the puzzle as a "portable alpha" optimization problem - implement via outright equities or ETFs whatever has the maximum alpha vs the index implemented with futures; implement the rest of the asset allocation with futures to achieve your targets.

With DJ600 you get drag of 2% on 10% of the future exposure? Isn't that only like .2%?

What is the .4% drag on dividends withholding from?

DJ600 and nik225 and then either do emerging with ETFs or a little msci futures if necessary

[comeinvest]

Wow expensive. Why buy msci futures at all? I might buy just 1 mxef for diversification and dollar hedging.

What is the alternative? My asset allocation is about world market cap, for maximal diversification benefits.
I think the DJ600 futures have less implied financing, but more collateral drag.
For emerging markets, you would have a drag of about 0.4% p.a. from dividend withholding if you implement the exposure without futures, that you have to net with the futures implied financing cost. That is before U.S. tax; in taxable accounts the situation is more complicated.
Options box spread currently have ca 0.3% financing spread above T-bills. In IRAs you can't use options box spreads; it is not clear if options box spreads result in unrelated business taxable income in 401(k) accounts.

I look at the puzzle as a "portable alpha" optimization problem - implement via outright equities or ETFs whatever has the maximum alpha vs the index implemented with futures; implement the rest of the asset allocation with futures to achieve your targets.

With DJ600 you get drag of 2% on 10% of the future exposure? Isn't that only like .2%?

What is the .4% drag on dividends withholding from?

DJ600 and nik225 and then either do emerging with ETFs or a little msci futures if necessary

Yes Nikkei225 futures seem to be very efficient, at least before JPY short-term rates rise - then you will have a cash collateral drag problem again. But that's not expected to happen for another few years, at least based on the current JPY yield curve.

EUR rates per yield curve were 3% for the next few years, now dropped to about 2.75% for the next year on average.

I think EM stocks have about 4% dividend yield, and >10% average withholding rates. I'm typing this from my head; check the details.

To optimize my cost, I tend to put developed market stocks in my 401k because from most countries I get a refund of the entire withholding tax per 0% treaty rates for pensions and 401(k) accounts. Some countries (U.K.) have no withholding. If your account is small you may say it's not worth the time; but once the account gets larger we're talking about serious money.
From EM you don't get refunds.
It's also hard to replicate the EM index via a representative sampling because most stocks are not accessible. Much easier for DM. I do it in my taxable account.
So in summary, for EM I currently use futures and some small cap value ETFs in the tax-advantaged accounts, and some EM ADRs in taxable. For DM I use futures in tax-advantaged, and individual stocks in both tax-advantaged and taxable.

[skierincolorado]

Wow expensive. Why buy msci futures at all? I might buy just 1 mxef for diversification and dollar hedging.

What is the alternative? My asset allocation is about world market cap, for maximal diversification benefits.
I think the DJ600 futures have less implied financing, but more collateral drag.
For emerging markets, you would have a drag of about 0.4% p.a. from dividend withholding if you implement the exposure without futures, that you have to net with the futures implied financing cost. That is before U.S. tax; in taxable accounts the situation is more complicated.
Options box spread currently have ca 0.3% financing spread above T-bills. In IRAs you can't use options box spreads; it is not clear if options box spreads result in unrelated business taxable income in 401(k) accounts.

I look at the puzzle as a "portable alpha" optimization problem - implement via outright equities or ETFs whatever has the maximum alpha vs the index implemented with futures; implement the rest of the asset allocation with futures to achieve your targets.

With DJ600 you get drag of 2% on 10% of the future exposure? Isn't that only like .2%?

What is the .4% drag on dividends withholding from?

DJ600 and nik225 and then either do emerging with ETFs or a little msci futures if necessary

Yes Nikkei225 futures seem to be very efficient, at least before JPY short-term rates rise - then you will have a collateral cash drag problem again. But that's not expected to happen for another few years, at least based on the current JPY yield curve.

EUR rates per yield curve were 3% for the next few years, now dropped to about 2.75% for the next year on average.

I think EM stocks have about 4% dividend yield, and >10% average withholding rates. I'm typing this from my head; check the details.

To optimize my cost, I tend to put developed market stocks in my 401k because from most countries I get a refund of the entire withholding tax per 0% treaty rates for pensions and 401(k) accounts. Some countries (U.K.) have no withholding. If your account is small you may say it's not worth the time; but once the account gets larger we're talking about serious money.
From EM you don't get refunds.
It's also hard to replicate the EM index via a representative sampling because most stocks are not accessible. Much easier for DM. I do it in my taxable account.

Essentially you hold EM in taxable to capture the higher foreign tax credit. Or use futures in tax advantaged.

Buy the developed market msci futures don't have much use because dj600 and nik225 are cheaper.

[comeinvest]

Essentially you hold EM in taxable to capture the higher foreign tax credit. Or use futures in tax advantaged.

Yes that's part of my strategy, but EM is hard to replicate and I don't want to use ETFs in taxable, that's my principle. I don't want to be locked into a fund once it has unrealized gains, and funds can also be an international tax headache if you ever move abroad. I added some thoughts about my tax strategy to my previous post after you cited it.

[comeinvest]

Essentially you hold EM in taxable to capture the higher foreign tax credit. Or use futures in tax advantaged.

Buy the developed market msci futures don't have much use because dj600 and nik225 are cheaper.

Correct, but DJ600 has a cash collateral drag, unless IB lets us know if any government bonds can be used as futures collateral in lieu of cash. I currently use a mix of DJ600+Nikkei225 and MXEA, until I figure out which is cheaper in the long run.

[skierincolorado]

Essentially you hold EM in taxable to capture the higher foreign tax credit. Or use futures in tax advantaged.

Buy the developed market msci futures don't have much use because dj600 and nik225 are cheaper.

Correct, but DJ600 has a cash collateral drag, unless IB lets us know if any government bonds can be used as futures collateral in lieu of cash. I currently use a mix of DJ600+Nikkei225 and MXEA, until I figure out which is cheaper in the long run.

Yeah I suppose the cash drag makes it closer but the rates on mxea are pretty clearly higher if what you posted is correct

[comeinvest]

Essentially you hold EM in taxable to capture the higher foreign tax credit. Or use futures in tax advantaged.

Buy the developed market msci futures don't have much use because dj600 and nik225 are cheaper.

Correct, but DJ600 has a cash collateral drag, unless IB lets us know if any government bonds can be used as futures collateral in lieu of cash. I currently use a mix of DJ600+Nikkei225 and MXEA, until I figure out which is cheaper in the long run.

Yeah I suppose the cash drag makes it closer but the rates on mxea are pretty clearly higher if what you posted is correct

The implied financing of MXEA and MXEF fluctuates every quarter. You can go to the ICE web site, they have the roll data more than 10 years back. But on average it's higher than other futures. I'll do some statistical analysis when I find some time.
I couldn't find historical or current EUREX roll data except in some older summary papers. Let me know if you can locate roll information for EUREX equity index futures.
But I went through the trouble and did some estimations based on comparisons with ETFs if you go a few pages back in this thread.

[comeinvest]

On 03/13 the difference of S&P 400 and S&P 500 implied rate widened again to a relatively typical 0.41%.
It looks like I lucked out and got and additional 8.5 bps with my fills, locking in a 0.495% p.a. spread difference with my offsetting equity futures pair for the next quarter, if my math is right.

Did you see they will have a micro mid cap starting March 20th? I am curious what the implied rate will be. If I understand, emd is 250k per contract which I don't quite have enough for. I'm getting close but I'm also hesitant to switch 250k straight from MES to EMD all at once.

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

I don't know what index the midcap and smallcap asset classes in PV refer to. For whatever reason, the ETF IVOO shows a different max drawdown than the midcap asset class for the 2011+ period.

The performance and risk statistics are probably not extremely meaningful, because most of the divergence of performance happened at rather singular events - tech bubble, GFC, Covid, etc. But mid caps and small caps have definitely higher market beta, so when using midcap futures this needs to be accounted for in the asset allocation.
Also read this thread: viewtopic.php?t=281359

The last chart is of a period when small cap value (VBR) and market / growth (VB) had about equal performance.









Added the following charts on 03/19/2023:

[cos]

I don't know what index the midcap and smallcap asset classes in PV refer to.

US Mid Cap
Professor Kenneth French's Research Data 1972-1998
Vanguard Mid Cap Index Fund (VIMSX) 1999+

US Small Cap
Professor Kenneth French's Research Data 1972-1989
Vanguard Small Cap Index Fund (NAESX) 1990+

For whatever reason, the ETF IVOO shows a different max drawdown than the midcap asset class for the 2011+ period.

This makes sense given IVOO's significantly greater size, value, and profitability loadings relative to VIMSX (thanks to the S&P's quality screen).

[km91]

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

Why bother venturing into the more thinly traded indexes, instead of just holding a fund directly? Treasuries and ES futures should be enough leverage to be able to get the more specific exposures in the portfolio unlevered. You can get 4 or 5x leverage in an IRA with 75% of NAV in a SCV fund

[comeinvest]

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

Why bother venturing into the more thinly traded indexes, instead of just holding a fund directly? Treasuries and ES futures should be enough leverage to be able to get the more specific exposures in the portfolio unlevered. You can get 4 or 5x leverage in an IRA with 75% of NAV in a SCV fund

Yes 75% of NAV in off-index positions and tilts, and 25% in collateral would work in IB IRA's with 2x margin requirement; although it would require relatively frequent monitoring and rebalancing. In trust accounts it's a bit better.

Because of the high financing cost of /ES (0.4-0.5% above risk-free rates last time I did a longer-term analysis), I go a different route. I use treasury and SOFR futures, /EMD (soon I will use the micro midcap futures that skier mentioned), AVUS, AVUV, and VBR in my tax-advantaged accounts. /EMD has negligible roll cost in terms of bid/ask spread, and implied financing at about T-bill rates for as long as I have monitored the contract. I also have international equities with 0% withholding tax rates in my tax-advantaged mHFEA accounts, along with some EM SCV ETFs (AVES, DGS, EYLD). I think this gives me the best diversification and the best spread of "portable alpha" in terms of implied rates and tax drag vs the equivalent index futures of each equity asset subclass. I learned the concept of portable alpha from public pensions and endowments.

The different financing rates of the different asset classes are a bit hard to explain; but we don't have to explain them, they are a fact of life. They provide a risk-free lunch, when shuffling around the implementation of the asset allocation accordingly.

[comeinvest]

I'm curious about the risk and return of ITT vs LTT depending on the initial slope of the yield curve.
I am comparing 150% equities / 250% ITT vs. 150% equities / 82% LTT, using VFITX for ITT and VUSTX for LTT. The 250% ITT and 82% LTT have equal duration based on current duration exposure (5.3 years for VFITX and 16.2 years for VUSTX). Unfortunately I can't locate historical durations, so the ratio might have been different in 2020 and in 2022.

Treasuries upside performance during a macroeconomic crash starting with a positively sloped yield curve:
On 02/28/2020, 5-year treasuries yielded 0.89%, and 30-year treasuries yielded 1.65%.
The performance in Mar 2020 was ever so slightly in favor of ITT - almost a tie.

Treasuries upside performance during a small macroeconomic mini-crash starting with a flat to slightly negatively sloped yield curve:
Free PV results not yet available for month-to-date.
On Feb 21 2023, 5-year treasuries yielded 4.16%, and 30-year treasuries yielded 3.98%.
Between Feb 21 2023 and Mar 17 2023 the portfolio performance was significantly in favor of ITT:
150% VFINX + 250% VFITX: -1.88 * 1.50 + 3.04 * 2.50 -> 4.78%
150% VFINX + 82% VUSTX: -1.88 * 1.50 + 5.9 * 0.82 -> 2.02%

Treasuries downside risk in a rising rates environment starting with a positively sloped yield curve:
Between 12/31/2021 and 12/30/2022, 5-year rates rose from 1.26% to 3.99%; 30-year rates rose from 1.9% to 3.97%.
The portfolio performance was nearly identical.

Summary: When the yield curve is flattish, short maturity treasuries might give the biggest upside bang for the risk.

If I had historical duration data, I could do much better modeling and backtesting.

[skierincolorado]

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

Why bother venturing into the more thinly traded indexes, instead of just holding a fund directly? Treasuries and ES futures should be enough leverage to be able to get the more specific exposures in the portfolio unlevered. You can get 4 or 5x leverage in an IRA with 75% of NAV in a SCV fund

Only if you were 100% U.S.

I also do international at 35% of assets, which when leveraged 1.5x becomes 52.5%. Then factor tilts. Then treasury futures. Then consider it's an IRA and the futures collateral requirement is doubled at IB. If you use foreign denominated futures to get foreign equity exposure, then you need to short the dollar to get the same performance as VXUS which is dollar denominated. And then consider that if markets crashed I want the flexibility to increase my leverage to 2x per lifecycle investing principles. It doesn't all fit without using mid-cap futures, foreign futures, and currency futures to short the dollar.

Or you end up overweight in large cap and/or sacrificing factor tilts.

[comeinvest]

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

Why bother venturing into the more thinly traded indexes, instead of just holding a fund directly? Treasuries and ES futures should be enough leverage to be able to get the more specific exposures in the portfolio unlevered. You can get 4 or 5x leverage in an IRA with 75% of NAV in a SCV fund

Only if you were 100% U.S.

I also do international at 35% of assets, which when leveraged 1.5x becomes 52.5%. Then factor tilts. Then treasury futures. Then consider it's an IRA and the futures collateral requirement is doubled at IB. If you use foreign denominated futures to get foreign equity exposure, then you need to short the dollar to get the same performance as VXUS which is dollar denominated. And then consider that if markets crashed I want the flexibility to increase my leverage to 2x per lifecycle investing principles. It doesn't all fit without using mid-cap futures, foreign futures, and currency futures to short the dollar.

Or you end up overweight in large cap and/or sacrificing factor tilts.

That's all correct. Like I said, logic dictates implementing without futures whatever has the highest expected alpha (mostly from implied financing cost and withholding taxes) in relation to the respective futures, in decreasing order, until the available cash minus the required futures collateral is consumed. The rest is implemented with futures to achieve the target asset allocation.

The future alpha from factor tilts of course is not known, which makes the puzzle a bit more challenging. But a pretty nicely diversified asset allocation can be achieved with the futures contracts available in the market, and spot positions with the available cash.

[comeinvest]

Should I add trend following to my mHFEA?
It helped big time in 3 of the 4 major stock and bond market drawdowns since 2000, and was neutral in one. Based on this, it should be a great addition to mHFEA, shouldn't it?

My understanding is that the more drawn-out a downturn, the more effective trend following will be at hedging the effect on the portfolio. For the tail risk where it would amplify a sudden large catastrophic event, see the 1987 crash in the chart further down. The realized risk was not large.

Charts from the paper: https://www.aqr.com/Insights/Trend-Following





Benefits to a portfolio from the paper https://www.grahamcapital.com/assets/In ... 202022.pdf





From the paper https://www.aqr.com/Insights/Research/J ... -Investing :

[comeinvest]

There will also be a micro S&P 600 small cap futures with the same launch date. The /SMC is very illiquid, so I'm not sure what is the point of the micro. I haven't looked at the calendar roll bid/ask spreads.

Why bother venturing into the more thinly traded indexes, instead of just holding a fund directly? Treasuries and ES futures should be enough leverage to be able to get the more specific exposures in the portfolio unlevered. You can get 4 or 5x leverage in an IRA with 75% of NAV in a SCV fund

Only if you were 100% U.S.

I also do international at 35% of assets, which when leveraged 1.5x becomes 52.5%. Then factor tilts. Then treasury futures. Then consider it's an IRA and the futures collateral requirement is doubled at IB. If you use foreign denominated futures to get foreign equity exposure, then you need to short the dollar to get the same performance as VXUS which is dollar denominated. And then consider that if markets crashed I want the flexibility to increase my leverage to 2x per lifecycle investing principles. It doesn't all fit without using mid-cap futures, foreign futures, and currency futures to short the dollar.

Or you end up overweight in large cap and/or sacrificing factor tilts.

Don't un-hedge the entire foreign currency exposure from foreign equity futures. That might be ok in the long run for non-leveraged investors as currencies are thought to be a zero sum game in the long run; but with a leveraged strategy I think you might have less volatility and drawdowns with partial hedging.

[comeinvest]

Why did the June maturity T-bill charts not reflect the Mar 2023 SOFR movement between 03/15 and 03/16 ? The Mar 2023 SOFR expires on 06/21.

[impatientInv]

On some days, the mHFEA portfolio actually behaves as designed. So much fun.

I see you are using the EMD - E-mini S&P MidCap 400 futures. Hoping that MMC - micro E-mini S&P MidCap 400 futures is available on IBKR soon, it was launched today, Hope it will have enough volume and is popular.

Don't see any volume in SMC - E-mini S&P SmallCap 600 futures. Is this correct? Have you bought this?

https://www.cmegroup.com/markets/equiti ... olume.html

[comeinvest]

I see you are using the EMD - E-mini S&P MidCap 400 futures. Hoping that MMC - micro E-mini S&P MidCap 400 futures is available on IBKR soon, it was launched today, Hope it will have enough volume and is popular.

Don't see any volume in SMC - E-mini S&P SmallCap 600 futures. Is this correct? Have you bought this?

https://www.cmegroup.com/markets/equiti ... olume.html

No, I'm not sure why they are adding a micro smallcap when there is no volume for the mini smallcap.

If you create a product request ticket for the micro midcap, they might add it faster.