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

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phantom0308
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by phantom0308 »

Is anyone aware of a good book explaining the details of the different costs associated with US treasury futures. I'm specifically interested in the implied financing rate embedded in the price and how to separate that out from the other costs (e.g. coupon payments). A tool would also be useful to check my understanding.
Z33
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Z33 »

Great thread here - been reading up and learning tons. Many thanks to all the contributors. A lot of focus seem to be on the COF of futures vs box vs LETF.

Out of curiosity, I wanted to understand what the simple un-levered total returns would be across this 3 instruments - SPY, UPRO, ES (futures) over time:

I have difficulty posting the picture from bloomberg but I get the following total returns:

Period: 6/30/2009 to 12/29/2023:
SPY --> 14.12% annual return (AR)
UPRO --> 30.46% AR
ES (generic) --> 12.13% AR

Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?

TIA and please keep up the good work here.

Cheers,
Z
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Z33 wrote: Tue Jan 09, 2024 12:16 am Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?
ES includes embedded financing cost; you don't pay cash for the exposure. Details and basics on futures are in discussions throughout the thread.
Last edited by comeinvest on Tue Jan 09, 2024 11:53 am, edited 1 time in total.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

i think it's been answered before in this thread, does IBKR allow for t bills or Treasuries to be pledged as futures collateral? my own experimentation leads me to believe the answer is yes, at least in the case of bills. this is not documented anywhere online and IBKR support seem to have no idea

when i calculate my credit interest accrual following IB's methodology outlined here and the end of day settled cash balances from the cash report, i get an accrual balance significantly lower than the actual accrual shown on the activity report

if instead i make the assumption that the value of CommodityRiskMargin in the calculation is offset by the market value of t bills in my account multiplied by (1 - T-Bill margin requirement), i am able to calculate an interest accrual balance inline with he actual accrual shown on the activity report. my calculation is slightly off from the actual accrual so i haven't fully reconciled, but in any case it seems apparent that i am earning credit interest on a higher settled cash balance than a word for word application of IB's interest calculation would imply
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Tue Jan 09, 2024 11:46 am i think it's been answered before in this thread, does IBKR allow for t bills or Treasuries to be pledged as futures collateral?
Yes. Details were discussed at length further up in this thread.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

phantom0308 wrote: Mon Jan 08, 2024 4:50 am Is anyone aware of a good book explaining the details of the different costs associated with US treasury futures. I'm specifically interested in the implied financing rate embedded in the price
Do you mean the Implied Repo Rate?
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unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

Z33 wrote: Tue Jan 09, 2024 12:16 am Great thread here - been reading up and learning tons. Many thanks to all the contributors. A lot of focus seem to be on the COF of futures vs box vs LETF.

Out of curiosity, I wanted to understand what the simple un-levered total returns would be across this 3 instruments - SPY, UPRO, ES (futures) over time:

I have difficulty posting the picture from bloomberg but I get the following total returns:

Period: 6/30/2009 to 12/29/2023:
SPY --> 14.12% annual return (AR)
UPRO --> 30.46% AR
ES (generic) --> 12.13% AR

Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?

TIA and please keep up the good work here.

Cheers,
Z
Would it be possible for you to look up implied repo rate, gross basis, and basis net of carry for a given treasury futures contract at a specific date on the Bloomberg terminal? If it is not too much trouble, of course. I would like to crosscheck my output against the Bloomberg.

Thank you for any help you can provide.
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comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

The inversion being undone. Note how front-end and back-end slope are naturally correlated by way of integration of forward rates.

Image
TheDoctor91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by TheDoctor91 »

Would it be better to do something like 200 ITT 100 SCV

or 150 Market with futures and 250 ITT

Are there any downsides to going SCV and then layering on ITT futures?
Should one use LETFs and layer on ITT futures?
Or are futures best period?
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

TheDoctor91 wrote: Thu Jan 11, 2024 11:43 am Would it be better to do something like 200 ITT 100 SCV

or 150 Market with futures and 250 ITT

Are there any downsides to going SCV and then layering on ITT futures?
Should one use LETFs and layer on ITT futures?
Or are futures best period?
Futures are always better than LETFs.
SCV or index: There are gazillions of threads in this forum; it's full of it.
If you decide on SCV, how much? 100 seems too low in comparison to 150 market. I think somebody came up with 1x SCV having equivalent risk to 1.2x index earlier in this thread.
That forum member also showed that SCV and ITT have higher combined sharpe ratio (possibly more negative correlation) than index and ITT.
So why lower ITT when replacing index with SCV?
Backtesting is difficult because we just increased the number of free parameters, and we have limited historical data and episodes.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Tue Jan 09, 2024 11:56 am
km91 wrote: Tue Jan 09, 2024 11:46 am i think it's been answered before in this thread, does IBKR allow for t bills or Treasuries to be pledged as futures collateral?
Yes. Details were discussed at length further up in this thread.
Having spent more time on this I can see that my t bill balance is not being used to offset the futures cash margin requirement. I have fully reconciled the cash report to the interest accrual. The cash balance that I am accruing credit interest on is:
total settled cash - $10,000 (balance threshold) - futures margin requirement - short position cash collateral - commodity segment excess settled cash

Image
director84
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by director84 »

km91 wrote: Thu Jan 11, 2024 1:27 pm
comeinvest wrote: Tue Jan 09, 2024 11:56 am
km91 wrote: Tue Jan 09, 2024 11:46 am i think it's been answered before in this thread, does IBKR allow for t bills or Treasuries to be pledged as futures collateral?
Yes. Details were discussed at length further up in this thread.
Having spent more time on this I can see that my t bill balance is not being used to offset the futures cash margin requirement. I have fully reconciled the cash report to the interest accrual. The cash balance that I am accruing credit interest on is:
total settled cash - $10,000 (balance threshold) - futures margin requirement - short position cash collateral - commodity segment excess settled cash

Image
Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

director84 wrote: Thu Jan 11, 2024 1:34 pm
km91 wrote: Thu Jan 11, 2024 1:27 pm
comeinvest wrote: Tue Jan 09, 2024 11:56 am
km91 wrote: Tue Jan 09, 2024 11:46 am i think it's been answered before in this thread, does IBKR allow for t bills or Treasuries to be pledged as futures collateral?
Yes. Details were discussed at length further up in this thread.
Having spent more time on this I can see that my t bill balance is not being used to offset the futures cash margin requirement. I have fully reconciled the cash report to the interest accrual. The cash balance that I am accruing credit interest on is:
total settled cash - $10,000 (balance threshold) - futures margin requirement - short position cash collateral - commodity segment excess settled cash

Image
Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
Taxable
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Quite a change within the last 2 days. 2y-20y yield differential is now more than 0.45%, and the forward rate curve should be even steeper. The 5y-10y segment is flatter than the 10y-20y segment; but probably only because of the still high +-5% short-term rates.
How quickly narratives can change.

Image
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Z33 wrote: Tue Jan 09, 2024 12:16 am Great thread here - been reading up and learning tons. Many thanks to all the contributors. A lot of focus seem to be on the COF of futures vs box vs LETF.

Out of curiosity, I wanted to understand what the simple un-levered total returns would be across this 3 instruments - SPY, UPRO, ES (futures) over time:

I have difficulty posting the picture from bloomberg but I get the following total returns:

Period: 6/30/2009 to 12/29/2023:
SPY --> 14.12% annual return (AR)
UPRO --> 30.46% AR
ES (generic) --> 12.13% AR

Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?

TIA and please keep up the good work here.

Cheers,
Z
That ES return likely represents the return on capital for unleveraged exposure with cash earning 0%. It's just the return of the contract. But consider that you can hold the contract with almost no collateral, which allows for leverqe and reducing cash drag. And the collateral can earn interest in some instances. I suggest reading the part of the thread on ES returns vs SPY and other forms of leverage carefully.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

director84 wrote: Thu Jan 11, 2024 1:34 pm Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
got this response from support
US-Ts will only collateralize futures margin when calculating principal for debit interest -- they do not offset for credit interest purposes.
if this is true Treasuries are only pledged when net cash < futures margin requirement
SongOfTheFates
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by SongOfTheFates »

Hey folks! Thanks for all the research and discussion you've all documented here.

I've been making my way through the thread, but has there been much discussion about using treasury spreads to hedge instead of going long treasuries? I've been eyeing using the 10y-2y and 10y-3mo SOFR futures and on a surface level it seems to be pretty cohesive as long as you're treating it as a tool you apply sparingly instead of a comprehensive 'portfolio' you can hold and backtest for 30+ years.

I'll elaborate more when it's not 3am where I'm at :)
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Fri Jan 19, 2024 12:24 pm
director84 wrote: Thu Jan 11, 2024 1:34 pm Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
got this response from support
US-Ts will only collateralize futures margin when calculating principal for debit interest -- they do not offset for credit interest purposes.
if this is true Treasuries are only pledged when net cash < futures margin requirement
That is an interesting piece of information; but we can only trust it once we empirically verify it. Until recently IB customer service vehemently denied that Treasuries can collateralize futures at all, even when presented with evidence to the contrary. They must have received some training recently; but we cannot trust any customer service response until verified.
I think for me it would not have too much impact because I rarely have significant positive USD cash balances. There is no interest on balances below $10k in any case.
It's also hard for me to understand this logic in a greater scheme.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Sun Jan 21, 2024 5:06 am
km91 wrote: Fri Jan 19, 2024 12:24 pm
director84 wrote: Thu Jan 11, 2024 1:34 pm Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
got this response from support
US-Ts will only collateralize futures margin when calculating principal for debit interest -- they do not offset for credit interest purposes.
if this is true Treasuries are only pledged when net cash < futures margin requirement
That is an interesting piece of information; but we can only trust it once we empirically verify it
It does seem to align with what I've seen in my account. I had a cash balance above the $10k threshold for most of December. I reconciled the cash report to the interest accrual and my t bill balance was never applied to offset the futures margin requirement. I did not accrue credit interest on the margin requirement despite having enough t bill collateral to satisfy it in full
Z33
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Z33 »

unemployed_pysicist wrote: Tue Jan 09, 2024 1:36 pm
Z33 wrote: Tue Jan 09, 2024 12:16 am Great thread here - been reading up and learning tons. Many thanks to all the contributors. A lot of focus seem to be on the COF of futures vs box vs LETF.

Out of curiosity, I wanted to understand what the simple un-levered total returns would be across this 3 instruments - SPY, UPRO, ES (futures) over time:

I have difficulty posting the picture from bloomberg but I get the following total returns:

Period: 6/30/2009 to 12/29/2023:
SPY --> 14.12% annual return (AR)
UPRO --> 30.46% AR
ES (generic) --> 12.13% AR

Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?

TIA and please keep up the good work here.

Cheers,
Z
Would it be possible for you to look up implied repo rate, gross basis, and basis net of carry for a given treasury futures contract at a specific date on the Bloomberg terminal? If it is not too much trouble, of course. I would like to crosscheck my output against the Bloomberg.

Thank you for any help you can provide.
Hi there,

I tried to look at the futures contract spec on bloomberg - could not find the items you are looking for. Ifyou have more information - I could try again.
CostcoBoxWine
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by CostcoBoxWine »

km91 wrote: Sun Jan 21, 2024 5:23 pm
comeinvest wrote: Sun Jan 21, 2024 5:06 am
km91 wrote: Fri Jan 19, 2024 12:24 pm
director84 wrote: Thu Jan 11, 2024 1:34 pm Is this a taxable account or IRA? It should be possible to use T-Bills as collateral in taxable but not IRA.
got this response from support
US-Ts will only collateralize futures margin when calculating principal for debit interest -- they do not offset for credit interest purposes.
if this is true Treasuries are only pledged when net cash < futures margin requirement
That is an interesting piece of information; but we can only trust it once we empirically verify it
It does seem to align with what I've seen in my account. I had a cash balance above the $10k threshold for most of December. I reconciled the cash report to the interest accrual and my t bill balance was never applied to offset the futures margin requirement. I did not accrue credit interest on the margin requirement despite having enough t bill collateral to satisfy it in full
Interested to see what's going on here, as i'm currently waiting on a deposit to clear before I start placing some contract orders. (taxable)

Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

Z33 wrote: Mon Jan 22, 2024 12:58 am
unemployed_pysicist wrote: Tue Jan 09, 2024 1:36 pm
Z33 wrote: Tue Jan 09, 2024 12:16 am Great thread here - been reading up and learning tons. Many thanks to all the contributors. A lot of focus seem to be on the COF of futures vs box vs LETF.

Out of curiosity, I wanted to understand what the simple un-levered total returns would be across this 3 instruments - SPY, UPRO, ES (futures) over time:

I have difficulty posting the picture from bloomberg but I get the following total returns:

Period: 6/30/2009 to 12/29/2023:
SPY --> 14.12% annual return (AR)
UPRO --> 30.46% AR
ES (generic) --> 12.13% AR

Interestingly ES futures posted the lowest return over the period - trying to understand why? roll cost/no dividends?

TIA and please keep up the good work here.

Cheers,
Z
Would it be possible for you to look up implied repo rate, gross basis, and basis net of carry for a given treasury futures contract at a specific date on the Bloomberg terminal? If it is not too much trouble, of course. I would like to crosscheck my output against the Bloomberg.

Thank you for any help you can provide.
Hi there,

I tried to look at the futures contract spec on bloomberg - could not find the items you are looking for. Ifyou have more information - I could try again.

Thanks for checking. All I know is that the screen looks like this on the Bloomberg terminal:

Image
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unemployed_pysicist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

SongOfTheFates wrote: Sun Jan 21, 2024 4:57 am Hey folks! Thanks for all the research and discussion you've all documented here.

I've been making my way through the thread, but has there been much discussion about using treasury spreads to hedge instead of going long treasuries? I've been eyeing using the 10y-2y and 10y-3mo SOFR futures and on a surface level it seems to be pretty cohesive as long as you're treating it as a tool you apply sparingly instead of a comprehensive 'portfolio' you can hold and backtest for 30+ years.

I'll elaborate more when it's not 3am where I'm at :)
I would be interested to hear more details about your yield spread (overlay?) and how you plan to systematically apply your exposure to this spread in the context of a mHFEA portfolio.

As I recall, the 10y-2y spread has about a 0.5 Pearson correlation coefficient to the unemployment rate from about 1953. So it is a proxy for the business cycle. However, going long this spread would not have helped in the most recent, 2022-2023 drawdown in equities and bonds, for example. In fact it would have been an additional drag on the portfolio. So I am curious how this additional tool could be used to improve mHFEA.
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km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Sat Jan 27, 2024 1:48 pm
comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
Thanks for confirming!
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

unemployed_pysicist wrote: Sat Jan 27, 2024 6:44 am
SongOfTheFates wrote: Sun Jan 21, 2024 4:57 am Hey folks! Thanks for all the research and discussion you've all documented here.

I've been making my way through the thread, but has there been much discussion about using treasury spreads to hedge instead of going long treasuries? I've been eyeing using the 10y-2y and 10y-3mo SOFR futures and on a surface level it seems to be pretty cohesive as long as you're treating it as a tool you apply sparingly instead of a comprehensive 'portfolio' you can hold and backtest for 30+ years.

I'll elaborate more when it's not 3am where I'm at :)
I would be interested to hear more details about your yield spread (overlay?) and how you plan to systematically apply your exposure to this spread in the context of a mHFEA portfolio.

As I recall, the 10y-2y spread has about a 0.5 Pearson correlation coefficient to the unemployment rate from about 1953. So it is a proxy for the business cycle. However, going long this spread would not have helped in the most recent, 2022-2023 drawdown in equities and bonds, for example. In fact it would have been an additional drag on the portfolio. So I am curious how this additional tool could be used to improve mHFEA.
I don't think it makes sense, because if you read the papers posted earlier in this thread, the Sharpe ratio is higher the lower the maturity of the treasuries down to about 12 months. So you would be short the most profitable part of the yield curve, and also the part that is the most un-correlated or anti-correlated to equities during equity market crashes.
Earlier in this thread I instead proposed a curve steepener as a perpetual or strategic position, i.e. an exaggerated version of mHFEA that is not constrained by >0% allocations on the yield curve. The 0% constraint as you move from HFEA to mHFEA seems arbitrary.
For example, +200% ITT and -50% ITT-equivalent LTT as a partial hedge of the ITT for a 150% ITT-equivalent total target duration exposure, but with better risk-adjusted performance as LTT has lousy risk-adjusted performance. LTT, for example the UB future or perhaps even better the 30-year swap futures contract, is the black sheep, if the premise of mHFEA is right.

The slope between 20y and 30y has historically been rather negative - almost the entire history, except ca. 5 years during ZIRP: viewtopic.php?p=7470297#p7470297
comeinvest
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Risk of broker failure

Post by comeinvest »

A question for folks who are implementing mHFEA with options credit spreads in taxable accounts - the cheapest cost of leverage in many scenarios:
Fully paid securities and excess margin securities are segregated in compliance with the U.S. Securities and Exchange Commission's Customer Protection Rule. This is the legal requirement for all U.S. broker-dealers. Your segregated assets are not available to general creditors and are protected against creditors' claims in the unlikely event that a broker-dealer becomes insolvent.
Excess margin securities in a customer account are those securities with a market value greater than 140 percent of the customer's debit balance.
With leverage in the 1.5x to 2x range using SPX options spreads, almost no securities in the account, if any at all, would be excess margin securities, if I read it right. Even with 1.3x or 1.4x leverage, a large portion of the account would not be protected.

SIPC covers losses from broker failures for customer account net equity that can not be recovered in bankruptcy. SIPC protection has a limit of $500k, that was last adjusted in 1980 and has been no longer adjusted for inflation since. $1 in 1980 is worth about $3.61 in 2024, i.e. the Securities Investor Protection Act (SIPA) in 1980 was intended to protect almost $2M per account in 2024 dollars. I guess the brokerage industry is happy that legislators "forgot" about adjusting the limit (my interpretation), as it reduces the brokers' liability and insurance premia. Presumably the brokers care more about their profit margin than about the safety of customer margin accounts.

Putting everything together, is my mHFEA account basically exposed to my broker-dealer's balance sheet and possible broker failure, i.e. my entire supposedly diversified (or so I thought) account is exposed to one company's credit risk? If true, how would this additional risk affect the risk/return of mHFEA? Should I adjust my expected return for the credit spread of the broker's senior debt, based on its credit rating?
If my understanding is right, this exposes accounts leveraged with SPX options more than accounts leveraged with futures, as with futures only the futures collateral is at risk in case of broker-dealer failures, if excess cash is regularly swept to the securities account.

Broker-dealers apparently also trade on their own account among other business activities like banking, and other than the segregation or special protection of customer assets (but only fully paid and excess margin assets), they don't seem to be regulated in regards to their claims paying ability like insurance companies are for example. Small brokers and possibly also big brokers can be thinly capitalized.

Typically all stocks, ETFs, and bonds in retail customer accounts are registered in street name for the benefit of the customer.

(January 2015) "Retail trading platform Interactive Brokers lost $120 million following the Swiss National Bank's shocking decision to remove its peg against the euro... Interactive Brokers Group, Inc. (NASDAQ GS: IBKR) Due to the sudden move in the value of the Swiss Franc yesterday, several of our customers suffered losses in excess of their deposit with us. Such debits amount to approximately $120 million, less than 2.5% of our net worth."

"Interactive Brokers LLC is rated "A- Outlook Stable" by Standard & Poor's."

(April 2023) "Charles Schwab saw its credit ratings downgraded this week by S&P Global, which said the firm faces increasing interest rate risk. The rating agency lowered its long-term issuer credit and senior unsecured debt ratings on Schwab from A to A-, preferred stock rating from BBB to BBB- and its short-term issuer credit and commercial paper ratings from A-1 to A-2."

A is not AA, AA is not AAA, and AAA is not as safe as treasuries for example. Not very confidence instilling in relation to a single firm-specific credit risk exposure of an entire account that might contain the entire assets of a lifetime strategy.
parval
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by parval »

km91 wrote: Sat Jan 27, 2024 1:48 pm
comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
May I ask exactly which instrument you're buying? When I search US treasury on IBKR there's like a ton options
director84
Posts: 48
Joined: Thu Dec 23, 2010 9:59 am

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

Post by director84 »

parval wrote: Mon Feb 05, 2024 8:36 pm
km91 wrote: Sat Jan 27, 2024 1:48 pm
comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
May I ask exactly which instrument you're buying? When I search US treasury on IBKR there's like a ton options
You can filter on Type "Bills" and Underlying "US-T" then pick the maturity date you want.
director84
Posts: 48
Joined: Thu Dec 23, 2010 9:59 am

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

Post by director84 »

parval wrote: Mon Feb 05, 2024 8:36 pm
km91 wrote: Sat Jan 27, 2024 1:48 pm
comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
May I ask exactly which instrument you're buying? When I search US treasury on IBKR there's like a ton options
You can filter on Type "Bills" and Underlying "US-T" then pick the maturity date you want.
director84
Posts: 48
Joined: Thu Dec 23, 2010 9:59 am

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

Post by director84 »

parval wrote: Mon Feb 05, 2024 8:36 pm
km91 wrote: Sat Jan 27, 2024 1:48 pm
comeinvest wrote: Tue Jan 23, 2024 10:37 pm
CostcoBoxWine wrote: Tue Jan 23, 2024 9:21 pm Is there something that needs to be done to "direct" IBKR to consider the T-bills as collateral, rather than just buying them and having them simply exist in your account? Wait some amount of time before entering any contracts?
Nothing needs to be done.
I zeroed out net cash as to have positive commodity cash and negative securities cash. Can now confirm that the collateral value of t bills is offsetting my futures margin requirement. I can reconcile TotalPrincipal from the interest report down to the penny, it is being offset by 99% of the t bill market value. I did not accrue debit interest despite showing negative settled cash in the securities account
May I ask exactly which instrument you're buying? When I search US treasury on IBKR there's like a ton options
You can filter on Type "Bills" and Underlying "US-T" then pick the maturity date you want.
comeinvest
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Joined: Mon Mar 12, 2012 6:57 pm

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

Post by comeinvest »

5y real yields from 2003 to now. I found those on the internet.

Image

Image

Image
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Thu Feb 08, 2024 8:14 am 5y real yields from 2003 to now. I found those on the internet.
Image
I look at this chart and the current real yield curve and see that every point on the curve today is at or above any real ITT yield that's been available in 20+ years. In fact a 20 or 30yr TIPS guarantees a real Treasury return above the average ITT real return over the past 30 years. If you have a strategy with a levered Treasury component what's the argument against buying longer date nominal or TIPS here. You've locked in a long term real return on the bond portion that is at least as good as average, you avoid the worst possible bond outcome of negative or zero real returns which Treasuries have experience over 20 and 30 year periods, and if longer dated rates keep rising any new contributions will be buying Treasuries at higher starting yields which is a tailwind for bonds
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Thu Feb 08, 2024 1:50 pm I look at this chart and the current real yield curve and see that every point on the curve today is at or above any real ITT yield that's been available in 20+ years. In fact a 20 or 30yr TIPS guarantees a real Treasury return above the average ITT real return over the past 30 years. If you have a strategy with a levered Treasury component what's the argument against buying longer date nominal or TIPS here. You've locked in a long term real return on the bond portion that is at least as good as average, you avoid the worst possible bond outcome of negative or zero real returns which Treasuries have experience over 20 and 30 year periods, and if longer dated rates keep rising any new contributions will be buying Treasuries at higher starting yields which is a tailwind for bonds
The fact and the logic that you can "double down" when an asset price falls (if you have additional funds available), would apply to any asset, but is not a good argument for buying a (possibly) falling asset.

Setting that aside, your observation that with longer dated treasuries or fixed income your return is more "secure" in the sense that you mentioned, is correct: You are locked in for 30 years.
With STT and ITT you are locked in for ca. 2 or 5 years respectively. If in 2 or 5 years the real yields are zero or negative and stay that way for the rest of your life, then you lost out. You would not even participate in those unexpected yield drops with your 2 or 5 year treasuries that you buy now, because forward rates further out than 2 or 5 years, respectively, will not result in capital gains from the short-term bonds that you buy now.
"what's the argument against buying longer date nominal or TIPS here" - The argument is that based on the evidence presented in this thread and in various papers referenced in this thread, over time, shorter-term treasuries have better Sharpe ratio, and also better risk/return in a portfolio in combination with equities.
With long-term fixed income, however, you are locked in both ways; it's a double-edged sword: If yields rise, or there is a longer inflationary period between now and 30 years from now, you are locked in the current yields, which might then be considered low yields.
Perhaps that is exactly the tradeoff that was mentioned a few times in this thread, and perhaps one of the risk-based explanations of the relatively lower return (per duration risk) of LTT: "Safety" in terms of knowing your yield for 30 years with LTT, vs. better expected returns for STT and ITT.
Also keep in mind that implied inflation expectations are just that: 1. expectations, and 2. implied. They may or may not reflect unbiased expectations, and of course the realized inflation is likely different from expected inflation. Under EMH, one would assume that there is a reason that treasuries currently trade at relatively high expected real yields.
I wouldn't disagree however, that yields look much more appealing than 2 years ago, and it is tempting to "lock them in". Unfortunately 2 years ago the sentiment was different; many people starting coming to terms with the prospect of a global race to zero, and with never being able to earn money again with fixed income. Some people felt compelled to lock in rates around 2%, to catch whatever juice was supposedly left in the race to zero (following yields in international markets, which were substantially below zero). It is hard to predict what the sentiment will be in the future, nor what "new normal" secular rate levels might be established. Don't forget that the chart above cuts out the 1964-1982 period. There is a chart with very long-run secular real rate levels somewhere in the middle of this thread.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Thu Feb 08, 2024 4:02 pm The fact and the logic that you can "double down" when an asset price falls (if you have additional funds available), would apply to any asset, but is not a good argument for buying a (possibly) falling asset.
A treasury isn't a typical risk asset. It's price always returns to par by a known date in the future, no other asset has this property
Setting that aside, your observation that with longer dated treasuries or fixed income your return is more "secure" in the sense that you mentioned, is correct: You are locked in for 30 years.
With STT and ITT you are locked in for ca. 2 or 5 years respectively. If in 2 or 5 years the real yields are zero or negative and stay that way for the rest of your life, then you lost out. You would not even participate in those unexpected yield drops with your 2 or 5 year treasuries that you buy now, because forward rates further out than 2 or 5 years, respectively, will not result in capital gains from the short-term bonds that you buy now.
It's not just that the yield is "locked in". You eliminate the left tail of bond outcomes. Treasuries have done zero or negative real over 20 and 30 year periods. In a strategy levering treasuries this seems like the worst possible outcome for the bond portion. If you buy a real 30yr bond today you derisk the bond portion of the strategy from the worst possible outcomes, and guarantee a return at least as good as the historical average. I can get a 30yr 2% real return or take the risk rolling ITT and possibly be exposed to a negative real return. What percentile of Treasury 30 year realized real returns does 2% real fall? 50th? You've just removed half of the distribution
"what's the argument against buying longer date nominal or TIPS here" - The argument is that based on the evidence presented in this thread and in various papers referenced in this thread, over time, shorter-term treasuries have better Sharpe ratio, and also better risk/return in a portfolio in combination with equities.
Push back on this as hard as you want, Sharpe applied to Treasuries is wrong. It treats Treasury duration as interest rate risk when it's not, it's an interest rate guarantee. You're facing a flat 5% yield curve, Sharpe says risk/return at the short end is optimal. But is this right? Qualitatively guaranteeing 5% yield for 30 years is superior to guaranteeing it for 2 years. If 5% yield is attractive for 2 years how could it not be even more attractive for 30 years, assuming you have that amount of time to invest. Sharpe is backwards looking, the value of a bond is it's future cashflow stream. We're faced with the yield curve as it is today and that's it. Buy a bond on any point on the curve and measure Sharpe at maturity. What has it told you? Absolutely nothing, the bond doesn't exist anymore
With long-term fixed income, however, you are locked in both ways; it's a double-edged sword: If yields rise, or there is a longer inflationary period between now and 30 years from now, you are locked in the current yields, which might then be considered low yields.
But what can we do, I can't predict the future. Yields could go either way from here. With LLT if yields continue to rise I have the option of buying in at higher yields with new contributions. If yields fall, to some extent I have the option of not buying in at lower yields. LTT are a floor on bond returns. With ITT I have much less choice, if yields fall or turn negative I have no choice but to roll into negative yields if I want to keep the exposure on. The yield / return stream of LTT is much less volatile than ITT, despite more price volatility. Over 20 or 30 years the yield of a portfolio of long bonds is pinned to the weighted average of starting yields, the yield of a portfolio of ITT has much more exposure to future changes in the yield curve.
I wouldn't disagree however, that yields look much more appealing than 2 years ago, and it is tempting to "lock them in". Unfortunately 2 years ago the sentiment was different; many people starting coming to terms with the prospect of a global race to zero, and with never being able to earn money again with fixed income. Some people felt compelled to lock in rates around 2%, to catch whatever juice was supposedly left in the race to zero (following yields in international markets, which were substantially below zero). It is hard to predict what the sentiment will be in the future, nor what "new normal" secular rate levels might be established. Don't forget that the chart above cuts out the 1964-1982 period. There is a chart with very long-run secular real rate levels somewhere in the middle of this thread.
I don't think you need to predict the future to see the value of a long treasury here. Rates go up and you continue buying bonds at the highest starting yields available in 30 years. Rates go down and you still have a Treasury portfolio generating 2% real. The level of rates isn't that relevant. Even if 30yr real yields were 0%, the trade off is still compelling. Lock in 0% on the current portion of the portfolio, or roll ITT and take the risk of a deeply negative outcome. I don't think it's as clear cut as looking at Sharpe or past risk adjusted returns
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Fri Feb 09, 2024 3:27 pm
comeinvest wrote: Thu Feb 08, 2024 4:02 pm The fact and the logic that you can "double down" when an asset price falls (if you have additional funds available), would apply to any asset, but is not a good argument for buying a (possibly) falling asset.
A treasury isn't a typical risk asset. It's price always returns to par by a known date in the future, no other asset has this property
Setting that aside, your observation that with longer dated treasuries or fixed income your return is more "secure" in the sense that you mentioned, is correct: You are locked in for 30 years.
With STT and ITT you are locked in for ca. 2 or 5 years respectively. If in 2 or 5 years the real yields are zero or negative and stay that way for the rest of your life, then you lost out. You would not even participate in those unexpected yield drops with your 2 or 5 year treasuries that you buy now, because forward rates further out than 2 or 5 years, respectively, will not result in capital gains from the short-term bonds that you buy now.
It's not just that the yield is "locked in". You eliminate the left tail of bond outcomes. Treasuries have done zero or negative real over 20 and 30 year periods. In a strategy levering treasuries this seems like the worst possible outcome for the bond portion. If you buy a real 30yr bond today you derisk the bond portion of the strategy from the worst possible outcomes, and guarantee a return at least as good as the historical average. I can get a 30yr 2% real return or take the risk rolling ITT and possibly be exposed to a negative real return. What percentile of Treasury 30 year realized real returns does 2% real fall? 50th? You've just removed half of the distribution
"what's the argument against buying longer date nominal or TIPS here" - The argument is that based on the evidence presented in this thread and in various papers referenced in this thread, over time, shorter-term treasuries have better Sharpe ratio, and also better risk/return in a portfolio in combination with equities.
Push back on this as hard as you want, Sharpe applied to Treasuries is wrong. It treats Treasury duration as interest rate risk when it's not, it's an interest rate guarantee. You're facing a flat 5% yield curve, Sharpe says risk/return at the short end is optimal. But is this right? Qualitatively guaranteeing 5% yield for 30 years is superior to guaranteeing it for 2 years. If 5% yield is attractive for 2 years how could it not be even more attractive for 30 years, assuming you have that amount of time to invest. Sharpe is backwards looking, the value of a bond is it's future cashflow stream. We're faced with the yield curve as it is today and that's it. Buy a bond on any point on the curve and measure Sharpe at maturity. What has it told you? Absolutely nothing, the bond doesn't exist anymore
With long-term fixed income, however, you are locked in both ways; it's a double-edged sword: If yields rise, or there is a longer inflationary period between now and 30 years from now, you are locked in the current yields, which might then be considered low yields.
But what can we do, I can't predict the future. Yields could go either way from here. With LLT if yields continue to rise I have the option of buying in at higher yields with new contributions. If yields fall, to some extent I have the option of not buying in at lower yields. LTT are a floor on bond returns. With ITT I have much less choice, if yields fall or turn negative I have no choice but to roll into negative yields if I want to keep the exposure on. The yield / return stream of LTT is much less volatile than ITT, despite more price volatility. Over 20 or 30 years the yield of a portfolio of long bonds is pinned to the weighted average of starting yields, the yield of a portfolio of ITT has much more exposure to future changes in the yield curve.
I wouldn't disagree however, that yields look much more appealing than 2 years ago, and it is tempting to "lock them in". Unfortunately 2 years ago the sentiment was different; many people starting coming to terms with the prospect of a global race to zero, and with never being able to earn money again with fixed income. Some people felt compelled to lock in rates around 2%, to catch whatever juice was supposedly left in the race to zero (following yields in international markets, which were substantially below zero). It is hard to predict what the sentiment will be in the future, nor what "new normal" secular rate levels might be established. Don't forget that the chart above cuts out the 1964-1982 period. There is a chart with very long-run secular real rate levels somewhere in the middle of this thread.
I don't think you need to predict the future to see the value of a long treasury here. Rates go up and you continue buying bonds at the highest starting yields available in 30 years. Rates go down and you still have a Treasury portfolio generating 2% real. The level of rates isn't that relevant. Even if 30yr real yields were 0%, the trade off is still compelling. Lock in 0% on the current portion of the portfolio, or roll ITT and take the risk of a deeply negative outcome. I don't think it's as clear cut as looking at Sharpe or past risk adjusted returns
Look.
We have 59 pages of relatively in-depth theory, backtests, deliberation, and reference papers.
You are coming along with "I'll buy the 30 year bond", and when long-term bonds fall, I'll double down (how savvy!), and 30 years later the 2% is guaranteed (which it is not, but setting that aside).
The objective of this thread was to optimize the distribution of lifetime investing outcomes with a time-varying portfolio strategy of less correlated assets
You are showing nothing; I don't even know how you define your optimization target. I have nothing to respond.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Fri Feb 09, 2024 4:10 pm The objective of this thread was to optimize the distribution of lifetime investing outcomes with a time-varying portfolio strategy of less correlated assets
Bonds can have negative real yields over 30 years. The current real yield on a 30yr bond is positive. Buying the 30yr real bond removes all outcomes to the left of the current real yield. Nothing that I am saying is not in line with the objective of this thread

If I have a portfolio of 100% NAV in equities, 100% NAV in Treasuries. I can buy a 30yr real bond and receive 2% real + the equity returns. Or I can roll ITTs and receive some unknown return, maybe negative, maybe positive but less than 2%, maybe positive but more than 2%, + the equity returns. There is a real trade off of significant value to be made
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Fri Feb 09, 2024 4:19 pm
comeinvest wrote: Fri Feb 09, 2024 4:10 pm The objective of this thread was to optimize the distribution of lifetime investing outcomes with a time-varying portfolio strategy of less correlated assets
Bonds can have negative real yields over 30 years. The current real yield on a 30yr bond is positive. Buying the 30yr real bond removes all outcomes to the left of the current real yield. Nothing that I am saying is not in line with the objective of this thread

If I have a portfolio of 100% NAV in equities, 100% NAV in Treasuries. I can buy a 30yr real bond and receive 2% real + the equity returns. Or I can roll ITTs and receive some unknown return, maybe negative, maybe positive but less than 2%, maybe positive but more than 2%, + the equity returns. There is a real trade off of significant value to be made
Your approach sounds appealing. It's basically market-timing the long-term treasury yields. You assume that LTT yields are currently above the norm. The big question is, is this true. Historically, it was true and not true, depending on which timeframe you contemplate. Whether your approach or ITT / mHFEA (static allocation, ignoring current yields) is better is probably very hard or impossible to quantify. Your approach is "safer" in case that the next 30 years are rather deflationary. On the other hand, the STT or ITT approach would be "safer" in an unexpected inflationary scenario: You would have your loss locked in for 30 years, while with STT or ITT the yields would probably "adjust" to new higher yield environments reflecting inflation (or higher real yields).
So it's a tradeoff; neither one incurs more or less risk in all scenarios. Your approach is purely predicated on your assumption that current yields are above the norm, and yields are more likely to fall from now on. If you were to follow through, you would still have to define a threshold for yields below which you would switch back to shorter maturities, to make your asset allocation a "strategy". When you do that, then you basically have a mean reversion strategy where the size of the bond portion depends on the current yields, which has been vaguely proposed a few times earlier in this thread.

What I said above is for nominal LTT. If you use TIPS, then you eliminate the inflation risk, but you still have the real yield risk. So again, your asset allocation is predicated on the assumption that current real yields are above the norm and more likely to fall. It's what some people call "market timing", but I personally think market timing is not inherently worse than a static allocation, if it's part of a thorough strategy, for example based on mean reversion assumptions - although there is a risk of parameter overfitting the past.
I think we have not backtested how correlated or anti-correlated inflation-protected treasuries are with equities, which would be material to the long-term returns of the strategy. Also, I don't know of an effective way or leveraging TIPS, so you would probably incur higher implied cost of leverage than you would incur with treasury futures, perhaps 0.2-0.3% or so. And in an IRA leveraging TIPS would not work, because there are no TIPS futures.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

km91 wrote: Fri Feb 09, 2024 4:19 pm
comeinvest wrote: Fri Feb 09, 2024 4:10 pm The objective of this thread was to optimize the distribution of lifetime investing outcomes with a time-varying portfolio strategy of less correlated assets
Bonds can have negative real yields over 30 years. The current real yield on a 30yr bond is positive. Buying the 30yr real bond removes all outcomes to the left of the current real yield. Nothing that I am saying is not in line with the objective of this thread

If I have a portfolio of 100% NAV in equities, 100% NAV in Treasuries. I can buy a 30yr real bond and receive 2% real + the equity returns. Or I can roll ITTs and receive some unknown return, maybe negative, maybe positive but less than 2%, maybe positive but more than 2%, + the equity returns. There is a real trade off of significant value to be made
One other thing: The return of leveraged treasuries are really controlled by the term premium - the difference between long-term and short-term yields, and not so much the absolute real yield.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by bond93 »

Posted this in the OG Hfea thread but realizing it would be better suited here.
Looking for feedback on a Ray Dalio style all-weather portfolio modified towards HFEA.
I have been experimenting with a small amount of funds, a few grand, with this allocation to see it in action:
55 UPRO
20 TMF
10 TYD 7-10yr trsrs.
7.5 UGL 2x Gold
7.5 UTSL 3x Utilities

The main difference between this allocation and the original AW is more stock, less LTT, and of course leverage. But the original AWP was never known for being a great return driver, more known for its stability.
In all the backtesting one can do with the historical data for each fund, this appears to beat HFEA in 90% of cases with smaller drawdowns. It seems to me that a big issue with HFEA is not just the huge drag that TMF can incur, but the lack of diversification overall. I want the fantastic upside potential of OG HFEA, but with a more reliable safety net. The stocks can still drive great returns with 55%, but this safety net is more diverse with a larger number of uncorrelated assets. Perhaps to my detriment, I do not have the grasp of using futures for that to be an option personally, so will likely only stick with ETFs. Yes, this is still an ER of .97 but it is the same ER as HFEA with more diversity of safety for your buck, perhaps making it worth the cost compared to the OG. Feel free to pick this apart...
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

bond93 wrote: Mon Feb 12, 2024 10:17 am Posted this in the OG Hfea thread but realizing it would be better suited here.
Looking for feedback on a Ray Dalio style all-weather portfolio modified towards HFEA.
I have been experimenting with a small amount of funds, a few grand, with this allocation to see it in action:
55 UPRO
20 TMF
10 TYD 7-10yr trsrs.
7.5 UGL 2x Gold
7.5 UTSL 3x Utilities

The main difference between this allocation and the original AW is more stock, less LTT, and of course leverage. But the original AWP was never known for being a great return driver, more known for its stability.
In all the backtesting one can do with the historical data for each fund, this appears to beat HFEA in 90% of cases with smaller drawdowns. It seems to me that a big issue with HFEA is not just the huge drag that TMF can incur, but the lack of diversification overall. I want the fantastic upside potential of OG HFEA, but with a more reliable safety net. The stocks can still drive great returns with 55%, but this safety net is more diverse with a larger number of uncorrelated assets. Perhaps to my detriment, I do not have the grasp of using futures for that to be an option personally, so will likely only stick with ETFs. Yes, this is still an ER of .97 but it is the same ER as HFEA with more diversity of safety for your buck, perhaps making it worth the cost compared to the OG. Feel free to pick this apart...
Shows us your backtests.
Without seeing those, 1. even if the historical backtests look good for your 5 assets, consider parameter fitting / selection bias. You selected those 5 assets probably because you saw some backtests outperforming HFEA. The same 5 assets may or may not outperform in the future. How big was the entire universe of assets and combinations percentage allocations that your tested, before you settled (for now) on those five? What would be the chance that the best 5-asset combination in any single n-year timeframe, and with allocation percentages optimized for that single n-year time frame, outperforms in this one n-year time frame in a random manner, i.e. purely by luck, even when the assets had hypothetically (for example) equal returns and were 0% correlated in infinite time? (I don't know your n.)
2. You have to add the 7.5% utilities to the 55% UPRO for total equity risk. They will have similar drawdown risk, even when they are less than perfectly correlated.
3. Gold has been shown to have little to no correlation or pattern to anything. (Always depending on the timeframe and interpretation.) With 0% real expected return (but some cost), I'm very skeptical that it serves anything in this portfolio without parameter fitting what you want to see.
4. I would be extremely skeptical that a ca. 1% expense ratio would be made up by any increase in risk-adjusted returns. Extremely skeptical. But you can probably implement your asset allocation or one close to it with futures, options, and near zero ER ETFs in both taxable and IRA.
5. Your portfolio is only slightly different from a leveraged equity index + treasuries portfolio: 37.5% out of a few hundred percent, and utilities are very similar to the equity index in terms of drawdown behavior. You can probably just forget it. You cannot do much damage, but I doubt it will move the needle much. And increasing the number of assets, factors, or other gimmicks usually has diminishing effects in the first place. With 2-3 assets or factors the juice from diversification is usually squeezed for the most part.
km91
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by km91 »

comeinvest wrote: Sun Feb 11, 2024 5:37 pm
km91 wrote: Fri Feb 09, 2024 4:19 pm
comeinvest wrote: Fri Feb 09, 2024 4:10 pm The objective of this thread was to optimize the distribution of lifetime investing outcomes with a time-varying portfolio strategy of less correlated assets
Bonds can have negative real yields over 30 years. The current real yield on a 30yr bond is positive. Buying the 30yr real bond removes all outcomes to the left of the current real yield. Nothing that I am saying is not in line with the objective of this thread

If I have a portfolio of 100% NAV in equities, 100% NAV in Treasuries. I can buy a 30yr real bond and receive 2% real + the equity returns. Or I can roll ITTs and receive some unknown return, maybe negative, maybe positive but less than 2%, maybe positive but more than 2%, + the equity returns. There is a real trade off of significant value to be made
Your approach sounds appealing. It's basically market-timing the long-term treasury yields. You assume that LTT yields are currently above the norm. The big question is, is this true. Historically, it was true and not true, depending on which timeframe you contemplate. Whether your approach or ITT / mHFEA (static allocation, ignoring current yields) is better is probably very hard or impossible to quantify. Your approach is "safer" in case that the next 30 years are rather deflationary. On the other hand, the STT or ITT approach would be "safer" in an unexpected inflationary scenario: You would have your loss locked in for 30 years, while with STT or ITT the yields would probably "adjust" to new higher yield environments reflecting inflation (or higher real yields).
So it's a tradeoff; neither one incurs more or less risk in all scenarios. Your approach is purely predicated on your assumption that current yields are above the norm, and yields are more likely to fall from now on. If you were to follow through, you would still have to define a threshold for yields below which you would switch back to shorter maturities, to make your asset allocation a "strategy". When you do that, then you basically have a mean reversion strategy where the size of the bond portion depends on the current yields, which has been vaguely proposed a few times earlier in this thread.

What I said above is for nominal LTT. If you use TIPS, then you eliminate the inflation risk, but you still have the real yield risk. So again, your asset allocation is predicated on the assumption that current real yields are above the norm and more likely to fall. It's what some people call "market timing", but I personally think market timing is not inherently worse than a static allocation, if it's part of a thorough strategy, for example based on mean reversion assumptions - although there is a risk of parameter overfitting the past.
I think we have not backtested how correlated or anti-correlated inflation-protected treasuries are with equities, which would be material to the long-term returns of the strategy. Also, I don't know of an effective way or leveraging TIPS, so you would probably incur higher implied cost of leverage than you would incur with treasury futures, perhaps 0.2-0.3% or so. And in an IRA leveraging TIPS would not work, because there are no TIPS futures.
My references to the current level of yields are probably a bit of a red herring, it's easy to look at recent history and have an opinion about yields today. That's not the approach I'm trying to take, what I'm arguing for is a Treasury allocation weighted more towards duration matched bonds, maybe with some inflation protected bonds, whatever the yields may be. The biggest risk with a HFEA type strategy that I see is on the Treasury side of the portfolio. On the equity side you can diversify globally, diversify into factors or managed futures, and feel fairly confident over the long term the portfolio will deliver an acceptable level of real return after financing costs if you can stick with it. The Treasury side is a concentrated exposure to a single asset that can have poor or negative long term returns, even before factoring financing costs, due to unexpected inflation or falling starting yields. Maybe when viewed as a whole portfolio this doesn't matter so much, but there is something off putting to me about levering up an asset that can potentially have negative real returns over 20 or 30 years. Another interest thought is diversifying into credit bonds, particularly USD EM governments bonds. Same exposure to the US government yield curve as a Treasury, plus a credit premium. Viewed through risk-adjusted returns framework this probably won't show up as an improvement in the portfolio, but I think it has the potential to get to a better long term outcome if the investor is willing to eat some of the volatility
bond93
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by bond93 »

comeinvest wrote: Mon Feb 12, 2024 11:40 am
bond93 wrote: Mon Feb 12, 2024 10:17 am Posted this in the OG Hfea thread but realizing it would be better suited here.
Looking for feedback on a Ray Dalio style all-weather portfolio modified towards HFEA.
I have been experimenting with a small amount of funds, a few grand, with this allocation to see it in action:
55 UPRO
20 TMF
10 TYD 7-10yr trsrs.
7.5 UGL 2x Gold
7.5 UTSL 3x Utilities

The main difference between this allocation and the original AW is more stock, less LTT, and of course leverage. But the original AWP was never known for being a great return driver, more known for its stability.
In all the backtesting one can do with the historical data for each fund, this appears to beat HFEA in 90% of cases with smaller drawdowns. It seems to me that a big issue with HFEA is not just the huge drag that TMF can incur, but the lack of diversification overall. I want the fantastic upside potential of OG HFEA, but with a more reliable safety net. The stocks can still drive great returns with 55%, but this safety net is more diverse with a larger number of uncorrelated assets. Perhaps to my detriment, I do not have the grasp of using futures for that to be an option personally, so will likely only stick with ETFs. Yes, this is still an ER of .97 but it is the same ER as HFEA with more diversity of safety for your buck, perhaps making it worth the cost compared to the OG. Feel free to pick this apart...
Shows us your backtests.
Without seeing those, 1. even if the historical backtests look good for your 5 assets, consider parameter fitting / selection bias. You selected those 5 assets probably because you saw some backtests outperforming HFEA. The same 5 assets may or may not outperform in the future. How big was the entire universe of assets and combinations percentage allocations that your tested, before you settled (for now) on those five? What would be the chance that the best 5-asset combination in any single n-year timeframe, and with allocation percentages optimized for that single n-year time frame, outperforms in this one n-year time frame in a random manner, i.e. purely by luck, even when the assets had hypothetically (for example) equal returns and were 0% correlated in infinite time? (I don't know your n.)
2. You have to add the 7.5% utilities to the 55% UPRO for total equity risk. They will have similar drawdown risk, even when they are less than perfectly correlated.
3. Gold has been shown to have little to no correlation or pattern to anything. (Always depending on the timeframe and interpretation.) With 0% real expected return (but some cost), I'm very skeptical that it serves anything in this portfolio without parameter fitting what you want to see.
4. I would be extremely skeptical that a ca. 1% expense ratio would be made up by any increase in risk-adjusted returns. Extremely skeptical. But you can probably implement your asset allocation or one close to it with futures, options, and near zero ER ETFs in both taxable and IRA.
5. Your portfolio is only slightly different from a leveraged equity index + treasuries portfolio: 37.5% out of a few hundred percent, and utilities are very similar to the equity index in terms of drawdown behavior. You can probably just forget it. You cannot do much damage, but I doubt it will move the needle much. And increasing the number of assets, factors, or other gimmicks usually has diminishing effects in the first place. With 2-3 assets or factors the juice from diversification is usually squeezed for the most part.
comeinvest I do appreciate your challenges to this approach.
I'm not at my main computer now, but a quick recreation is here:
https://www.portfoliovisualizer.com/bac ... 0ldi3D9zyw
Unfortunately UTSL doesn't go back too far.
As far as rationale behind this goes, I only selected these assets and allocations because it was essentially mimicking Dalio's All-weather fund, a quite well time-tested approach to which he also applied leverage. The AWP allocation is probably the smoothest ride that I have ever seen when it comes to backtests, so I'm just trying to move in that direction. The original 30% stocks was personally not rich enough for me and significantly underperformed the S&P (https://www.portfoliovisualizer.com/bac ... RvghkKNhbB), hence bumping up to 55 in the spirit of OG HFEA. And if TMF is the proverbial bull in the China shop, spreading that original 45% load to 3 other assets should reduce risk for the same ER. I tried most allocation combinations between tmf and tyd in multiples of 5 before landing on these. Again, the goal was to not tinker with the OG AW too much. Utilities were the closest I could get to commodities 3x, if there is a better substitute I'm all ears. As far as the gold is concerned, isn't that precisely why Dalio and others use it? Its lack of correlation to anything? Note that the 3rd portfolio in that test did the best and had 15% gold.

If we forget UTSL and just go with gold we can get a further lookback period. It doesn't quite beat HFEA but its clearly a smoother ride. https://www.portfoliovisualizer.com/bac ... hHHhgtpRrX

I'm not sure I follow the aversion to or belief that increasing the number of uncorrelated assets is somehow a gimmick, when many of the greatest names in investing preach/practice it: Swensen, Dalio, etc. This strategy clearly depends on a safety net, so why just have one variety? That 37% may seem insignificant on the way up, but if stocks or treasuries take a dive and your 165% position becomes an 80% position, that 37% could jump up in relation by 2 or 3x to save you..(as demonstrated in that first link) plus the same argument would apply to the original AWP, it is only slightly different than an unleveraged all stocks/treasuries portfolio so why include 15% out of 100? ...if 37.5 out of ~290 is not worth it? (I do agree with your point about the utilites being not a perfect substitute, still searching for an alternative)
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

bond93 wrote: Mon Feb 12, 2024 1:30 pm As far as the gold is concerned, isn't that precisely why Dalio and others use it? Its lack of correlation to anything? Note that the 3rd portfolio in that test did the best and had 15% gold.
1. I doubt that something with no correlation to anything and 0% expected return will be of any use if I add to any portfolio.
2. Like I said before. Take say 10 commodities, or anything else like used cars, fine art, or plastic straws - and backtest over whatever limited backtesting timeframe - you will probably find more than one, maybe 3-5, that improve your portfolio by Sharpe ratio or whatever, during that timeframe. High risk of parameter fitting the past!
Last edited by comeinvest on Wed Feb 14, 2024 4:17 am, edited 2 times in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

bond93 wrote: Mon Feb 12, 2024 1:30 pm comeinvest I do appreciate your challenges to this approach.
I'm not at my main computer now, but a quick recreation is here:
https://www.portfoliovisualizer.com/bac ... 0ldi3D9zyw
Unfortunately UTSL doesn't go back too far.
As far as rationale behind this goes, I only selected these assets and allocations because it was essentially mimicking Dalio's All-weather fund, a quite well time-tested approach to which he also applied leverage. The AWP allocation is probably the smoothest ride that I have ever seen when it comes to backtests, so I'm just trying to move in that direction. The original 30% stocks was personally not rich enough for me and significantly underperformed the S&P (https://www.portfoliovisualizer.com/bac ... RvghkKNhbB), hence bumping up to 55 in the spirit of OG HFEA.
...
1. 5 years backtest has next to no meaning. Including the Sharpe ratio that's shown in PV, because it will be controlled by either luck or by valuation changes of mean-reverting parameters during that time frame.
Starting in 1964 before the inflation period is in my opinion the minimum for a long-term leveraged strategy, either backtested or at least theoretically simulated. Even that doesn't cover the 1929 crash, and some different bond yield level regimes and term premia before that time; but arguably the modern financial system is different from that of before 1929, so I would say at least 60 years, that covers a few different macroeconomic and financial scenarios each of which was relatively unique on its own, but could be repeated any time in the future.

2. You just discovered a common problem when adding assets trying to improve risk-adjusted performance: It's darn hard to beat equities+treasuries. Many smart people in history tried, many of them much smarter than myself ;)
A typical realization is that great, your ride is smoother; but it's just a matter of time until a dumb index investor caught up and outperforms you with almost certainty. Why? Because the Sharpe ratio become less important in the long run. The distribution of final outcomes is the meaningful target measure. Not to mention the dumb ass index investor pays close to zero fees.

3. I doubt your gold or utilities help you during macroeconomic crashes like treasuries do.

4. For unleveaged portfolios, 100% equities will almost always win, if you wait long enough. If you remove the leverage constraint, you can substitute or add lower volatility underlyings. But it's hard to find underlyings other than equities and treasuries that have positive expected returns and/or negative correlation to equities, that are materially different from equities or from a combination of equities and treasuries, and that can be implemented with low fees.
Last edited by comeinvest on Mon Feb 12, 2024 11:49 pm, edited 6 times in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

bond93 wrote: Mon Feb 12, 2024 1:30 pm Utilities were the closest I could get to commodities 3x, if there is a better substitute I'm all ears.
I think utilities have little to nothing to do with commodities. I didn't look at Dalio's portfolio, but if he meant a rebalanced basket of commodity futures, I have a post somewhere up in this thread with some interesting charts of backtests over more than hundred or two hundred years if I remember right. Diversified commodity futures and trend following are perhaps the two most promising candidates for additions to mHFEA, especially if their cost comes down or if you are willing to implement them yourself.
Last edited by comeinvest on Wed Feb 14, 2024 4:14 am, edited 1 time in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

bond93 wrote: Mon Feb 12, 2024 1:30 pm I'm not sure I follow the aversion to or belief that increasing the number of uncorrelated assets is somehow a gimmick, when many of the greatest names in investing preach/practice it: Swensen, Dalio, etc. This strategy clearly depends on a safety net, so why just have one variety? That 37% may seem insignificant on the way up, but if stocks or treasuries take a dive and your 165% position becomes an 80% position, that 37% could jump up in relation by 2 or 3x to save you..(as demonstrated in that first link) plus the same argument would apply to the original AWP, it is only slightly different than an unleveraged all stocks/treasuries portfolio so why include 15% out of 100? ...if 37.5 out of ~290 is not worth it? (I do agree with your point about the utilites being not a perfect substitute, still searching for an alternative)
... Because either they underperform 100% equities in the long run with almost mathematical certainty, or they are essentially identical to equities+treasuries in some ratio as they provide essentially exposure to the same underlying risk factors, just with slightly more sophisticated implementation. For example Swensen can be simulated with low-cost ETFs, mostly equities+treasuries and some other stuff; but his other stuff like private equity or corporate bonds didn't really do much; he underperformed equities over long times, then outperformed during other times; also fake smoothing of the curve by way of using non-listed substitutes for equities (private equity, private real estate); last time I checked there was no consistent improvement over a plain vanilla equities+treasuries portfolio other than perhaps from a slight alpha from manager selection in niche markets that we don't have access to. Don't forget that he needs to justify his job position somehow, so he cannot just go and say "Harvard University, dump all your donations into 60/40 or into Berkshire shares and call it day; can I go home early today?"
stunning_linguist
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by stunning_linguist »

A bit of a tangent:

If anyone recalls the repo market liquidity crisis of 2019, SOFR rates spiked surprisingly high during that time, and SOFR rates overall became very volatile. What's the general consensus on the likelihood of such liquidity crises reoccurring in the future, and their impact on SOFR futures vs. Treasury futures returns in mHFEA?

Example: In September 2019, the SOFR rate spiked up above 5%. If I had held a SOFR future whose maturity / reference period coincided with that event, it would surely have eaten at my returns "for no good reason"

And a follow-up question: Are investors adequately compensated for taking on that specific risk? Because I currently imagine that SOFR futures returns have 2 components: 1 component tied to the underlying (and shifting) term structure of risk free interest rates, and 1 component that captures these idiosyncratic black swan risks (like liquidity crunches) that arise purely out of inefficiencies in the market. And knowing how bad the market is at pricing/predicting black swan events, I'm feeling kind of skeptical of SOFR futures
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