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

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Kbg
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Joined: Thu Mar 23, 2017 11:33 am

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

Post by Kbg »

Joey Jo Jo Jr wrote: Mon Jul 01, 2024 8:27 am Any thoughts on an efficient way to be around 70% global equity (e.g., VT) and 70% intermediate to short term TIPS?

For a little while I had NTSX/NTSI with some TIPS funds to balance (and low overall leverage) but at this point just have a lot more confidence in real rates going down than I do nominal rates.

BTW I have enjoyed the parts of the thread I could understand. Thanks!
Not super efficient but checks the easy box. UPRO, EFO and EDC would give you global equities scaled/allocated to the correct global allocation percentages. IDK what daily volume is on the foreign component, but I would check that as well. TIPS way too many options so I won't get into any suggestions here.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

I found this interesting chart on x.com
It looks like STT had higher returns than cash during the 1952-1980 period.

Image
Last edited by comeinvest on Wed Jul 10, 2024 4:15 pm, 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 »

TrendingValue wrote: Mon Jul 08, 2024 8:52 pm If it's not vol decay, how do we account for the difference?

https://x.com/HML_Compounder/status/162 ... IYOtw&s=19

https://www.portfoliovisualizer.com/bac ... zjmUhFnLxf
Here's a complex explanation: https://moontowermeta.com/the-gamma-of-levered-etfs/

The short gamma effect is a cost that should be considered compared to futures. Looks like it is long term about
.7% when I run HMLs set up myself since 2009.
I went briefly over the article. I didn't see where the rebalancing frequency comes into play. Not sure if the ca. -1% average rolling return of 33.33% UPRO, 66.67% 3-month t-bill (rebalanced monthly) vs. 100% S&P500 is because of different mean reversion behavior, or due to the different scale. 30 times the rebalancing period (monthly vs. daily) should reflect 30 times larger up or down movements with the accompanying gamma effect (a.k.a. volatility decay), right?

Also, if UPRO ER is ca. 1%, then ca. -0.33% in the rolling return is from the ER.
The other 0.67% might be in part from the spread of the implied financing cost of the swaps over T-bill rates. The financing cost spread of futures was ca. 0.5% lately if I remember right; so if implied rates of swaps are similar and if we add some provisioning fee of the swap counterparties and/or cash management losses, we arrive pretty accurately at the 0.67%.
This would then confirm that daily and monthly rebalancing yield about equal end results. (I'm not sure about the drop during the GFC in the chart.)

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

Post by TrendingValue »

Thank you. There is a large Twitter thread on this and it's debated whether the vol decay from LETFs daily rebalanced could play a role in the reduction of returns or if it's an autocorrelation issue or negative skew.

Here's the thread: https://x.com/kev_inverse/status/181074 ... gX_qg&s=19
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

TrendingValue wrote: Wed Jul 10, 2024 9:49 pm Thank you. There is a large Twitter thread on this and it's debated whether the vol decay from LETFs daily rebalanced could play a role in the reduction of returns or if it's an autocorrelation issue or negative skew.

Here's the thread: https://x.com/kev_inverse/status/181074 ... gX_qg&s=19
I think I explained it in my previous post.
TrendingValue
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by TrendingValue »

Looking back I think you did, too, I just found the explanation hard to follow-- that's on my level of knowledge, not yours.

And to that chart you posted above that I shared on X - it's from Antti Ilmanens Expected Returns. I can highly recommend that and Investing Amid Low Expected Returns. Though I found the latter a far easier read and the former more textbook-like.
boglerdude
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by boglerdude »

Dummy here.

Considering PSLDX. (2x SnP + 2x long bonds). Is this how it works:

I give PIMCO $10,000. They borrow 10k from (a big commercial bank?) at daily SOFR rate, currently 5.3%

PIMCO buys 10k of SnP 500 and 10K long bond fund w/14 year duration. (Simplified, half VFIAX half VBLAX)

When would a margin call happen, ie how could I get forced to sell at a loss with no possibility to recover.

This is for long term hold in IRA. ty
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

boglerdude wrote: Tue Jul 16, 2024 4:09 am Dummy here.

Considering PSLDX. (2x SnP + 2x long bonds). Is this how it works:

I give PIMCO $10,000. They borrow 10k from (a big commercial bank?) at daily SOFR rate, currently 5.3%

PIMCO buys 10k of SnP 500 and 10K long bond fund w/14 year duration. (Simplified, half VFIAX half VBLAX)

When would a margin call happen, ie how could I get forced to sell at a loss with no possibility to recover.

This is for long term hold in IRA. ty
There's a dedicated PSLDX thread that is floating around here somewhere that might better answer your question.

That said, PSLDX is 1x S&P + 1x long-term bonds (I think... maybe intermediate-term), not 2x + 2x.

If I recall correctly, they don't borrow funds directly. Most of the money is invested directly in bonds (mostly a mix of US treasuries and corporate bonds), while a portion is in options, swaps, and futures for the S&P exposure (there are also some interest rate swaps; I don't know the exact purpose though). There are a mix of long and short positions, they aren't borrowing straight cash. You can look up their exact holdings on their website; there are hundreds of underlying assets that make up the composition.

You will never be margin-called. They likely rebalance periodically to ensure they aren't either.

But yes, it's similar in nature to having invested $10k VFIAX and $10k VBLAX yourself.
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