HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by dziuniek »

tradri wrote: Mon Apr 12, 2021 7:27 am
dziuniek wrote: Mon Apr 12, 2021 7:19 am
Don't get me started on oil. I should've taken delivery when it went negative... ;)
Haha yes, get paid for the delivery and immediately dump it into the nearest river. :sharebeer
Was thinking fill up the basement, but that works. :sharebeer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

tradri wrote: Mon Apr 12, 2021 6:24 am Have you considered adding gold to the strategy?

Hedgefundie stated that he believes we will never see the kind of inflation again that would make holding gold worthwhile. But it did happen in the past 50 years, so I think it makes sense to plan for that.

When looking at the Simba backtesting spreadsheet from 1969 to 2020, a 3x 55/25/20 stocks/treasuries/gold portfolio outperformed a 3x 70/30 stocks/treasuries portfolio, while having a lower volatility. (it even has a higher Sharpe ratio than the S&P 500)

Specifically, it saved the portfolio from the 1970s to the 1990s, where 3x 70/30 stocks/treasuries underperformed the S&P 500.

This makes sense, as it follows Ray Dalio's logic of the All Weather portfolio. Gold performs well in times when both inflation is high and economic growth is low, so it seems like a good, uncorrelated asset.

Are there any reasons for not adding gold to the 3x leveraged ETF strategy?
A practical reason is that there is no 3x gold LETF, which means that you need to fill up a proportionately larger fraction of the portfolio with the 2x fund (which has no expected return) to get the same effect as a 3x fund. That inclusion of a zero-return fund will tend to cut the long-term returns most of the time; you'd have to judge for yourself if the insurance is worth it or if something like 3x LTT is enough of a compensatory factor.

Personally I would investigate if there were macroeconomic times when gold has a reasonable chance to excel, and rotate it in then. But I don't have an answer as to how to do that, so it's wishful thinking. And such a strategy is not Boglehead.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

tradri wrote: Mon Apr 12, 2021 6:24 am Hedgefundie stated that he believes we will never see the kind of inflation again that would make holding gold worthwhile. But it did happen in the past 50 years, so I think it makes sense to plan for that
The Fed has also changed policy since the 1970's and has instituted a mandate to manage inflation
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Hydromod wrote: Mon Apr 12, 2021 8:06 am
A practical reason is that there is no 3x gold LETF, which means that you need to fill up a proportionately larger fraction of the portfolio with the 2x fund (which has no expected return) to get the same effect as a 3x fund. That inclusion of a zero-return fund will tend to cut the long-term returns most of the time; you'd have to judge for yourself if the insurance is worth it or if something like 3x LTT is enough of a compensatory factor.

Personally I would investigate if there were macroeconomic times when gold has a reasonable chance to excel, and rotate it in then. But I don't have an answer as to how to do that, so it's wishful thinking. And such a strategy is not Boglehead.
That's really strange. Normally the European investment market lags behind the US investment market by 5-10 years.

WisdomTree Europe offers a 3x Gold ETP since 2012, so it's strange that no American company has bothered implementing something similar: https://www.wisdomtree.eu/en-gb/etps/co ... -leveraged

According to the backtest, it isn't true that adding a 3x gold ETF would lower the CAGR. It actually improved the CAGR, for the same reason that 3x treasuries improved the CAGR.

I don't want to deal with market-timing gold, but the backtest shows that it even works if held over the entire time period.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Ramjet wrote: Mon Apr 12, 2021 8:15 am
The Fed has also changed policy since the 1970's and has instituted a mandate to manage inflation
I think the macroeconomic concern is, that once interest rates are at zero, a central bank doesn't have many options to stimulate the economy further, except for printing more money.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

tradri wrote: Mon Apr 12, 2021 8:16 am That's really strange. Normally the European investment market lags behind the US investment market by 5-10 years.

WisdomTree Europe offers a 3x Gold ETP since 2012, so it's strange that no American company has bothered implementing something similar: https://www.wisdomtree.eu/en-gb/etps/co ... -leveraged

According to the backtest, it isn't true that adding a 3x gold ETF would lower the CAGR. It actually improved the CAGR, for the same reason that 3x treasuries improved the CAGR.

I don't want to deal with market-timing gold, but the backtest shows that it even works if held over the entire time period.
There was a 3x ETN (not ETF) UGLD available in the US that stopped not too long ago. I don't know why, but folks were grumbling about the additional risks of the ETN versus ETF format when it was available.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by am »

Do you guys still feel like this strategy 55 upro/45 tmf is worthwhile given current threats of rising inflation, bond yields, and very high stock valuations?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

dziuniek wrote: Mon Apr 12, 2021 6:38 am Some articles floating online now about how bitcoin is replacing gold in that area now.
So maybe it wouldn't work as well going forward.

Would adding a more diversified basket of commodities do the trick in a high infaltion times?
What leveraged commodity ETFs would you consider?

My backtests (here) suggest that diversification can still be a free lunch, even with 3x leveraged volatile assets.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Hydromod wrote: Mon Apr 12, 2021 8:41 am
tradri wrote: Mon Apr 12, 2021 8:16 am That's really strange. Normally the European investment market lags behind the US investment market by 5-10 years.

WisdomTree Europe offers a 3x Gold ETP since 2012, so it's strange that no American company has bothered implementing something similar: https://www.wisdomtree.eu/en-gb/etps/co ... -leveraged

According to the backtest, it isn't true that adding a 3x gold ETF would lower the CAGR. It actually improved the CAGR, for the same reason that 3x treasuries improved the CAGR.

I don't want to deal with market-timing gold, but the backtest shows that it even works if held over the entire time period.
There was a 3x ETN (not ETF) UGLD available in the US that stopped not too long ago. I don't know why, but folks were grumbling about the additional risks of the ETN versus ETF format when it was available.
They were probably grumbling about those ETNs because they were unsecured debt obligations.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

tradri wrote: Mon Apr 12, 2021 8:52 am
Hydromod wrote: Mon Apr 12, 2021 8:41 am
tradri wrote: Mon Apr 12, 2021 8:16 am That's really strange. Normally the European investment market lags behind the US investment market by 5-10 years.

WisdomTree Europe offers a 3x Gold ETP since 2012, so it's strange that no American company has bothered implementing something similar: https://www.wisdomtree.eu/en-gb/etps/co ... -leveraged

According to the backtest, it isn't true that adding a 3x gold ETF would lower the CAGR. It actually improved the CAGR, for the same reason that 3x treasuries improved the CAGR.

I don't want to deal with market-timing gold, but the backtest shows that it even works if held over the entire time period.
There was a 3x ETN (not ETF) UGLD available in the US that stopped not too long ago. I don't know why, but folks were grumbling about the additional risks of the ETN versus ETF format when it was available.
They were probably grumbling about those ETNs because they were unsecured debt obligations.
Yes
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

Gold miners are more correlated with gold than they are with stocks. There is a 3X gold miners etf available, GDXU
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tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

privatefarmer wrote: Tue Apr 13, 2021 10:55 am Gold miners are more correlated with gold than they are with stocks. There is a 3X gold miners etf available, GDXU
Yeah, this might be a good alternative if no 3x gold ETF is available. However, it's only an ETN, so there's probably credit risk.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

Anyone know of an HSA provider that’ll let you invest in LETFs?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

am wrote: Mon Apr 12, 2021 8:43 am Do you guys still feel like this strategy 55 upro/45 tmf is worthwhile given current threats of rising inflation, bond yields, and very high stock valuations?
A nice thing about this strategy is that you can bring in Boglehead notions, like time in the market is more important than timing the market. It's a little different, since conditions at entry do play quite a roll in this strategy's effectiveness. On the plus side, the insurance portion of the strategy (TMF) is cheaper now than it has been in close to two years. But really, the thinking is the same. If you're convinced as to the soundness of the investment strategy, and it's a long term strategy you're considering, it's best to just jump in, since you could wait on the sidelines indefinitely for the *right* moment to get started.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dziuniek »

Hydromod wrote: Mon Apr 12, 2021 8:51 am
dziuniek wrote: Mon Apr 12, 2021 6:38 am Some articles floating online now about how bitcoin is replacing gold in that area now.
So maybe it wouldn't work as well going forward.

Would adding a more diversified basket of commodities do the trick in a high infaltion times?
What leveraged commodity ETFs would you consider?

My backtests (here) suggest that diversification can still be a free lunch, even with 3x leveraged volatile assets.
I am not sure they need to be leveraged - just volatile enough.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

dziuniek wrote: Tue Apr 13, 2021 2:30 pm
Hydromod wrote: Mon Apr 12, 2021 8:51 am
dziuniek wrote: Mon Apr 12, 2021 6:38 am Some articles floating online now about how bitcoin is replacing gold in that area now.
So maybe it wouldn't work as well going forward.

Would adding a more diversified basket of commodities do the trick in a high infaltion times?
What leveraged commodity ETFs would you consider?

My backtests (here) suggest that diversification can still be a free lunch, even with 3x leveraged volatile assets.
I am not sure they need to be leveraged - just volatile enough.
I am personally a bit skeptical about commodities, as they are the only asset class that had a negative annualized return over the last 13 years. https://www.portfoliovisualizer.com/ass ... rrelations
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jdinatale »

Got into this strategy on 2/9/21, and today is the first day that the combined 55/45 UPRO/TMF is in the green. Glad I stayed the course and rebalanced. :sharebeer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Tue Apr 13, 2021 2:56 pm
dziuniek wrote: Tue Apr 13, 2021 2:30 pm
Hydromod wrote: Mon Apr 12, 2021 8:51 am
dziuniek wrote: Mon Apr 12, 2021 6:38 am Some articles floating online now about how bitcoin is replacing gold in that area now.
So maybe it wouldn't work as well going forward.

Would adding a more diversified basket of commodities do the trick in a high infaltion times?
What leveraged commodity ETFs would you consider?

My backtests (here) suggest that diversification can still be a free lunch, even with 3x leveraged volatile assets.
I am not sure they need to be leveraged - just volatile enough.
I am personally a bit skeptical about commodities, as they are the only asset class that had a negative annualized return over the last 13 years. https://www.portfoliovisualizer.com/ass ... rrelations
Keep in mind that one does not need positive annualized return to take advantage of diversification, especially when a dynamic asset allocation (ie TAA) is used. Just need to capture some of the gain when it is positive.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Tue Apr 13, 2021 3:22 pm
tradri wrote: Tue Apr 13, 2021 2:56 pm
I am personally a bit skeptical about commodities, as they are the only asset class that had a negative annualized return over the last 13 years. https://www.portfoliovisualizer.com/ass ... rrelations
Keep in mind that one does not need positive annualized return to take advantage of diversification, especially when a dynamic asset allocation (ie TAA) is used. Just need to capture some of the gain when it is positive.
In the asset class correlation matrix I posted above, the stocks/commodity correlation is pretty high, so in that time period it wasn't really a diversifying, uncorrelated asset.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Tue Apr 13, 2021 3:26 pm
jarjarM wrote: Tue Apr 13, 2021 3:22 pm
tradri wrote: Tue Apr 13, 2021 2:56 pm
I am personally a bit skeptical about commodities, as they are the only asset class that had a negative annualized return over the last 13 years. https://www.portfoliovisualizer.com/ass ... rrelations
Keep in mind that one does not need positive annualized return to take advantage of diversification, especially when a dynamic asset allocation (ie TAA) is used. Just need to capture some of the gain when it is positive.
In the asset class correlation matrix I posted above, the stocks/commodity correlation is pretty high, so in that time period it wasn't really a diversifying, uncorrelated asset.
Yeah, that's why the original TAA template is trying to look at large set of assets class and determine the best performance based on look back (momentum factor) and weight them based on their correlation and variance (min variance).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Tue Apr 13, 2021 4:07 pm Yeah, that's why the original TAA template is trying to look at large set of assets class and determine the best performance based on look back (momentum factor) and weight them based on their correlation and variance (min variance).
I haven't looked a lot into tactical asset allocation, but from what I can tell it's based on over-weighting the recently well-performing asset class? Doesn't this go against the idea of mean-reversion?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

jdinatale wrote: Tue Apr 13, 2021 3:17 pm Got into this strategy on 2/9/21, and today is the first day that the combined 55/45 UPRO/TMF is in the green. Glad I stayed the course and rebalanced. :sharebeer
Nice! I finally got around to updating the excel I use to track HF performance. I started playing around with the LETFs in very small dollar amounts in my 401k in mid-March of 2020, and didn't move into something like a HFEA until July of last year. Granted, I'm not doing the traditional fixed allocation, instead playing around with a mix of UPRO/TQQQ/TMF. But from 3/18/20 to present, the portion of my 401k dedicated to this strategy is up 116.45%. So staying the course and giving the strategy some time to convince you of its worth seems like the right bet to me. :sharebeer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

rchmx1 wrote: Tue Apr 13, 2021 4:20 pm
jdinatale wrote: Tue Apr 13, 2021 3:17 pm Got into this strategy on 2/9/21, and today is the first day that the combined 55/45 UPRO/TMF is in the green. Glad I stayed the course and rebalanced. :sharebeer
Nice! I finally got around to updating the excel I use to track HF performance. I started playing around with the LETFs in very small dollar amounts in my 401k in mid-March of 2020, and didn't move into something like a HFEA until July of last year. Granted, I'm not doing the traditional fixed allocation, instead playing around with a mix of UPRO/TQQQ/TMF. But from 3/18/20 to present, the portion of my 401k dedicated to this strategy is up 116.45%. So staying the course and giving the strategy some time to convince you of its worth seems like the right bet to me. :sharebeer
In case you're interested, here's the link to tracking performance from various ppl who started a version of the HFEA.

viewtopic.php?f=10&t=326588
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Tue Apr 13, 2021 4:18 pm
jarjarM wrote: Tue Apr 13, 2021 4:07 pm Yeah, that's why the original TAA template is trying to look at large set of assets class and determine the best performance based on look back (momentum factor) and weight them based on their correlation and variance (min variance).
I haven't looked a lot into tactical asset allocation, but from what I can tell it's based on over-weighting the recently well-performing asset class? Doesn't this go against the idea of mean-reversion?
It does somewhat, it'll depend on if you believe in momentum in investing. Also, mean-reversion, if one believes in it, only happens over long period of time (years/decades), so TAA is focusing only on very recently (3-6months) well-performing asset class.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Tue Apr 13, 2021 4:30 pm
It does somewhat, it'll depend on if you believe in momentum in investing. Also, mean-reversion, if one believes in it, only happens over long period of time (years/decades), so TAA is focusing only on very recently (3-6months) well-performing asset class.
Well, by rebalancing leveraged ETFs quarterly you are already kinda letting momentum do its work over 3 months, right?

I think changing the asset allocation based on recent performance will lead to a significant reduction in bonds (gold?) in a strong stock bull market, which will probably lead to much higher drawdowns and longer recoveries once it inevitably crashes.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

jarjarM wrote: Tue Apr 13, 2021 4:27 pm
rchmx1 wrote: Tue Apr 13, 2021 4:20 pm Nice! I finally got around to updating the excel I use to track HF performance. I started playing around with the LETFs in very small dollar amounts in my 401k in mid-March of 2020, and didn't move into something like a HFEA until July of last year. Granted, I'm not doing the traditional fixed allocation, instead playing around with a mix of UPRO/TQQQ/TMF. But from 3/18/20 to present, the portion of my 401k dedicated to this strategy is up 116.45%. So staying the course and giving the strategy some time to convince you of its worth seems like the right bet to me. :sharebeer
In case you're interested, here's the link to tracking performance from various ppl who started a version of the HFEA.

viewtopic.php?f=10&t=326588
Thanks, ya I plan to post an update in that thread just to add another data point. I just got lazy about updating my tracking excel doc since I had been tracking the combined performance across my 401k and brokerage account, but then things got a bit messy when I moved my brokerage account from Schwab to IBKR, then switched the brokerage HFEA portion from 3x to 2x LETFs, then switched that to a mix of 3x and 1x. Messy and inelegant, but at least it was done with an eye towards opportunism. For simplicity sake I think I'll track them separately from now on.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Tue Apr 13, 2021 4:36 pm
jarjarM wrote: Tue Apr 13, 2021 4:30 pm
It does somewhat, it'll depend on if you believe in momentum in investing. Also, mean-reversion, if one believes in it, only happens over long period of time (years/decades), so TAA is focusing only on very recently (3-6months) well-performing asset class.
Well, by rebalancing leveraged ETFs quarterly you are already kinda letting momentum do its work over 3 months, right?

I think changing the asset allocation based on recent performance will lead to a significant reduction in bonds (gold?) in a strong stock bull market, which will probably lead to much higher drawdowns and longer recoveries once it inevitably crashes.
That didn't happen in the backtest we've done by several posters. Before the March 2020 crash, most previous crashes were play out over months, allowing momentum to signal a shift in trend and switching over to a different asset class. Of course, no rebalancing strategy can perfectly handle all scenarios. TAA is lagging a bit since 2020 crash, but so is any momentum driven strategy. That's why it really depends how much you believe in momentum investing. If you don't, then TAA in its original form is not for you.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Tue Apr 13, 2021 4:51 pm
That didn't happen in the backtest we've done by several posters. Before the March 2020 crash, most previous crashes were play out over months, allowing momentum to signal a shift in trend and switching over to a different asset class. Of course, no rebalancing strategy can perfectly handle all scenarios. TAA is lagging a bit since 2020 crash, but so is any momentum driven strategy. That's why it really depends how much you believe in momentum investing. If you don't, then TAA in its original form is not for you.
Could you please link those posts? Were the backtests only done for the post-2008 stock market bull run?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Tue Apr 13, 2021 4:53 pm
jarjarM wrote: Tue Apr 13, 2021 4:51 pm
That didn't happen in the backtest we've done by several posters. Before the March 2020 crash, most previous crashes were play out over months, allowing momentum to signal a shift in trend and switching over to a different asset class. Of course, no rebalancing strategy can perfectly handle all scenarios. TAA is lagging a bit since 2020 crash, but so is any momentum driven strategy. That's why it really depends how much you believe in momentum investing. If you don't, then TAA in its original form is not for you.
Could you please link those posts? Were the backtests only done for the post-2008 stock market bull run?
There were substantial discussion around page 130s.

Here's one sim using UPRO/TQQQ/TMF simulated from 2000 and on. millinialblue (sp?) built a shiny app for anyone who want to play around with the parameters. Like we said before, there's lots of info embedded in this thread for anyone who really wants to spend the time to comb through it. Also, whether or not one believes in the backtest result depends on one's view in investment theory. Good luck :beer
https://bogleheads.org/forum/viewtopic. ... 1#p5872971
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Tue Apr 13, 2021 5:05 pm
There were substantial discussion around page 130s.

Here's one sim using UPRO/TQQQ/TMF simulated from 2000 and on. millinialblue (sp?) built a shiny app for anyone who want to play around with the parameters. Like we said before, there's lots of info embedded in this thread for anyone who really wants to spend the time to comb through it. Also, whether or not one believes in the backtest result depends on one's view in investment theory. Good luck :beer
https://bogleheads.org/forum/viewtopic. ... 1#p5872971
Thank you. I'll have a look at it, although it looks like too much market-timing for my taste.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by isubrama »

privatefarmer wrote: Tue Apr 13, 2021 2:05 pm Anyone know of an HSA provider that’ll let you invest in LETFs?
Fidelity ?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

privatefarmer wrote: Tue Apr 13, 2021 10:55 am Gold miners are more correlated with gold than they are with stocks. There is a 3X gold miners etf available, GDXU
From what I can read up online, gold miners are much more volatile than gold, without having much higher returns, so they probably wouldn't be ideal for a leveraged ETF strategy.
However, despite the high correlation between spot gold and gold miners, the volatility of miner returns was double that of spot gold (36.4% vs. 18.8%). And, despite the higher volatility, gold miner equities had average annual returns that were only slightly higher than spot gold (6.5% vs. 5.2%).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cellis212 »

I've added both gold miners and crypto to my allocation to hedge potential inflation. Given the correlation with tech, I pulled the crypto part from UPRO instead of treasuries. My current allocation is:

50 - UPRO
35 - EDV
10 - NUGT (2x gold miners)
2.5 - BTC
2.5 - ETH

I also do a version of the rolling VIX options, except I do 3-month out (-10ish delta) puts on SVXY and roll them when they are 1 month from expiry.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

tradri wrote: Tue Apr 13, 2021 5:15 pm
jarjarM wrote: Tue Apr 13, 2021 5:05 pm
There were substantial discussion around page 130s.

Here's one sim using UPRO/TQQQ/TMF simulated from 2000 and on. millinialblue (sp?) built a shiny app for anyone who want to play around with the parameters. Like we said before, there's lots of info embedded in this thread for anyone who really wants to spend the time to comb through it. Also, whether or not one believes in the backtest result depends on one's view in investment theory. Good luck :beer
https://bogleheads.org/forum/viewtopic. ... 1#p5872971
Thank you. I'll have a look at it, although it looks like too much market-timing for my taste.
I mean couldn't adding gold at all could be considered market timing?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Ramjet wrote: Wed Apr 14, 2021 10:04 am
I mean isn't adding gold at all could be considered market timing?
No, I don't think so. Just as stocks and bonds offset each other in high/low economic growth periods, gold should offset the portfolio in high/low inflation periods. This is following Ray Dalio's risk parity concept.

Image

Image

I am skeptical about commodities though, but gold should do the trick.
Also, I wouldn't overweight bonds as much as the all weather portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

One of the more interesting insights I've learned from this forum is that there is no reason to believe that gold acts as a hedge against inflation. Just strengthened my lack of interest in holding gold as a part of my portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

It's worth noting that, just as Sharpe ratio changes when you introduce leverage, an optimal portfolio asset allocation will change with leverage as well.

Reason being: leverage isn't free, hence your return will be lower with disproportionately more risk (relative to an unleveraged portfolio), hence the efficient frontier curve transforms. If 7.5% gold is recommended in an unleveraged portfolio, maybe 2% or 0% would be the equivalent in a 2x leveraged portfolio. I'm making the numbers up obviously, but the point is that it doesn't scale linearly... more like piecewise linear.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Wed Apr 14, 2021 10:22 am One of the more interesting insights I've learned from this forum is that there is no reason to believe that gold acts as a hedge against inflation. Just strengthened my lack of interest in holding gold as a part of my portfolio.
What convinced you that gold isn't a good inflation hedge?

We don't have a ton of data, but it completely saved a 3x leveraged ETF portfolio from 1970 to 1990.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

DMoogle wrote: Wed Apr 14, 2021 10:23 am It's worth noting that, just as Sharpe ratio changes when you introduce leverage, an optimal portfolio asset allocation will change with leverage as well.

Reason being: leverage isn't free, hence your return will be lower with disproportionately more risk (relative to an unleveraged portfolio), hence the efficient frontier curve transforms. If 7.5% gold is recommended in an unleveraged portfolio, maybe 2% or 0% would be the equivalent in a 2x leveraged portfolio. I'm making the numbers up obviously, but the point is that it doesn't scale linearly... more like piecewise linear.
This isn't entirely true. Comparing different stocks/bonds/gold allocations in the Simba backtesting spreadsheet, 55/25/20 3x stocks/bonds/gold had the highest CAGR from 1969 to 2020. Holding uncorrelated assets is even more important in a leveraged ETF portfolio than in an unleveraged portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

For anyone considering an allocation to gold or gold miners as an inflation hedge: if you haven't looked into it already, I would suggest actually comparing the behavior between the two. I think a decent duo for comparison is GLD and GDX, as you can reach back to 2007-2008, period of relatively high inflation.

Gold acting as a hedge is one thing, but you have to decouple the resource from the company extracting it. I wouldn't bet on miner stocks (especially leveraged) to act as a predictable hedge in any inflationary scenario. Expenses could outweigh revenue.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

Ramjet wrote: Wed Apr 14, 2021 10:04 am I mean couldn't adding gold at all could be considered market timing?
Why would adding or removing an asset from your static allocation, with expected long-term horizon, be considered market timing? :confused One basically says they want to be ready for possible inflation sometime in future and account for that in their AA.

If you would say that you follow inflation and choose to add gold at X moment and exit at Y moment, when inflation drops, then that would definitely be market timing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

tradri wrote: Wed Apr 14, 2021 10:25 am
rchmx1 wrote: Wed Apr 14, 2021 10:22 am One of the more interesting insights I've learned from this forum is that there is no reason to believe that gold acts as a hedge against inflation. Just strengthened my lack of interest in holding gold as a part of my portfolio.
What convinced you that gold isn't a good inflation hedge?

We don't have a ton of data, but it completely saved a 3x leveraged ETF portfolio from 1970 to 1990.
You're absolutely right that we're dealing with a paucity of data. To that point, the period you're mentioning is the one time that gold has spiked during a time of high inflation. The sample size we're using to justify the assertion that gold is a good inflation hedge consists of a single event. Granted, if we imagine you and I made a bet about adding gold to a modified HFEA we wouldn't know who was right for decades (and might not know even then), so I don't mean to come off like I'm speaking with certainty about the worthwhileness of adding gold to this investment strategy. It is just a conclusion I've reached from reading numerous posts on this forum from people whose investment knowledge I greatly respect. For instance, nisiprius's post (directly after the OP), in this thread. And also this thread from a while back. And plenty others floating around.

My concern is that possibly the truth of the matter is that gold doesn't behave in any predictable way, in which case there is no reason to believe that it will spike during periods of high/rising inflation. But by relying on such a small sample size, we consider our work done, and so don't continue to investigate alternatives which might actually behaving in the predictable desired way.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

OohLaLa wrote: Wed Apr 14, 2021 10:45 am
Ramjet wrote: Wed Apr 14, 2021 10:04 am I mean couldn't adding gold at all could be considered market timing?
Why would adding or removing an asset from your static allocation, with expected long-term horizon, be considered market timing? :confused One basically says they want to be ready for possible inflation sometime in future and account for that in their AA.

If you would say that you follow inflation and choose to add gold at X moment and exit at Y moment, when inflation drops, then that would definitely be market timing.
Do you think most people who are adding gold right now to their portfolios are doing so because they fear inflation and low rates or because they want to hold it as part of their long term allocation? Do you think these same people would hold gold if rates were higher? Most people are trying to time the market and as far as the Excellent Adventure is concerned gold would take away from either stocks or crash insurance with TMF. Seems like wasted space. If you believe uncontrollable inflation is coming back why would anyone be in the Excellent Adventure?
Last edited by Ramjet on Wed Apr 14, 2021 11:07 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Also, gold couldn't be purchased until the early 1970s, if I understand correctly. So there is possibility that it was a one-time event for that reason.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

OohLaLa wrote: Wed Apr 14, 2021 10:41 am For anyone considering an allocation to gold or gold miners as an inflation hedge: if you haven't looked into it already, I would suggest actually comparing the behavior between the two. I think a decent duo for comparison is GLD and GDX, as you can reach back to 2007-2008, period of relatively high inflation.

Gold acting as a hedge is one thing, but you have to decouple the resource from the company extracting it. I wouldn't bet on miner stocks (especially leveraged) to act as a predictable hedge in any inflationary scenario. Expenses could outweigh revenue.
I would also be careful treating gold and gold miners as the same/similar asset class, as they have quite different correlations to stocks and different annual returns. https://www.portfoliovisualizer.com/ass ... &months=36
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Wed Apr 14, 2021 10:52 am
You're absolutely right that we're dealing with a paucity of data. To that point, the period you're mentioning is the one time that gold has spiked during a time of high inflation. The sample size we're using to justify the assertion that gold is a good inflation hedge consists of a single event. Granted, if we imagine you and I made a bet about adding gold to a modified HFEA we wouldn't know who was right for decades (and might not know even then), so I don't mean to come off like I'm speaking with certainty about the worthwhileness of adding gold to this investment strategy. It is just a conclusion I've reached from reading numerous posts on this forum from people whose investment knowledge I greatly respect. For instance, nisiprius's post (directly after the OP), in this thread. And also this thread from a while back. And plenty others floating around.

My concern is that possibly the truth of the matter is that gold doesn't behave in any predictable way, in which case there is no reason to believe that it will spike during periods of high/rising inflation. But by relying on such a small sample size, we consider our work done, and so don't continue to investigate alternatives which might actually behaving in the predictable desired way.
Since you are saying that gold only proved to be a successful hedge against inflation once, I have to add, that we only had a period of significant inflation (significantly above 5%) once since the 1950s. So, when viewed through that lens, it has a success rate of 100% so far.

Image

When combined in a leveraged ETF strategy, I think the fact that gold behaves in an unpredictable way is a big plus, as it has the lowest correlation to stocks, after US treasuries: https://www.portfoliovisualizer.com/ass ... rrelations.

By alternatives, I assume you mean TIPS? I haven't seen a 3x leveraged ETF on TIPS yet, and they seem to have a higher correlation to stocks than gold does, according to the asset class correlation matrix I linked above.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Ramjet wrote: Wed Apr 14, 2021 11:04 am
Do you think most people who are adding gold right now to their portfolios are doing so because they fear inflation and low rates or because they want to hold it as part of their long term allocation? Do you think these same people would hold gold if rates were higher? Most people are trying to time the market and as far as the Excellent Adventure is concerned gold would take away from either stocks or crash insurance with TMF. Seems like wasted space. If you believe uncontrollable inflation is coming back why would anyone be in the Excellent Adventure?
I don't see the time period 1970 to 1980 as "uncontrollable" inflation, but it was enough inflation to meaningfully hurt the HFEA strategy, causing it to underperform the S&P 500 for 20 years. I think it is sensible to prepare for that.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Hydromod wrote: Wed Apr 14, 2021 11:05 am Also, gold couldn't be purchased until the early 1970s, if I understand correctly. So there is possibility that it was a one-time event for that reason.
Sure, could be.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

tradri wrote: Wed Apr 14, 2021 11:37 am Since you are saying that gold only proved to be a successful hedge against inflation once, I have to add, that we only had a period of significant inflation (significantly above 5%) once since the 1950s. So, when viewed through that lens, it has a success rate of 100% so far.

By alternatives, I assume you mean TIPS? I haven't seen a 3x leveraged ETF on TIPS yet, and they seem to have a higher correlation to stocks than gold does, according to the asset class correlation matrix I linked above.
This kind of thinking makes me nervous. Gold also spiked during the '00s when inflation was decreasing:

Image

Are we adding gold because we have good reason to believe that it will act as an inflation hedge? Or are we wanting to add an inflation hedge, and we choose gold because at one time it happened to spike at the same time that inflation spiked? It's just a matter of what each of us wants to consider as reliable evidence.

Unfortunately I don't have any inflation hedge alternatives to offer. But the lack of obvious alternatives doesn't count as evidence that one possibility is well-founded.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

rchmx1 wrote: Wed Apr 14, 2021 12:01 pm
This kind of thinking makes me nervous. Gold also spiked during the '00s when inflation was decreasing:

Image

Are we adding gold because we have good reason to believe that it will act as an inflation hedge? Or are we wanting to add an inflation hedge, and we choose gold because at one time it happened to spike at the same time that inflation spiked? It's just a matter of what each of us wants to consider as reliable evidence.

Unfortunately I don't have any inflation hedge alternatives to offer. But the lack of obvious alternatives doesn't count as evidence that one possibility is well-founded.
I think it's the best we have right now, so I am comfortable using it. I just feel safer knowing (hoping) that my leveraged portfolio won't get completely destroyed should we enter such a market environment in the future.
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