HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by Shopcat »

cos wrote: Thu Jul 08, 2021 11:17 am
Shopcat wrote: Wed Jul 07, 2021 9:30 pm Been lurking, running HFEA for a short period so far, does anyone have a rebalance plan quarterly but also an upper and lower bound that triggers a rebalance? For example if UPRO drops to 40% you would rebalance.
I played with doing that for a bit but ultimately found that it was hurting performance. Just rebalance quarterly, and you'll be fine.
I figured it would hurt in the short term but wondered if it could play out better in long term in the event of another large downturn of 35% plus?
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Shopcat wrote: Wed Jul 07, 2021 9:30 pm Been lurking, running HFEA for a short period so far, does anyone have a rebalance plan quarterly but also an upper and lower bound that triggers a rebalance? For example if UPRO drops to 40% you would rebalance.
I done some backtesting early on and this doesn't seem to be working out that well. Mainly due to the fact that the last 2 extended bear market (2000/2008), you're better off staying in TMF longer and at a high asset allocation. Those 2 events erase any whipsaw effects you get from setting a lower bond during normal time.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Ramjet wrote: Thu Jul 08, 2021 7:46 am
Hydromod wrote: Wed Jul 07, 2021 10:07 pm I have tried playing with a few timing models but I haven't ever fixed on something that I was comfortable with. So far my backtesting has almost always gotten tripped up by whipsaws and such when I tried testing all-in/all-out strategies. I find that the more successful ones have stopped working as well in the last five or ten years, perhaps because the market is reacting faster with all the automated trading strategies. I can't convince myself that performance isn't mostly due to timing luck.
So many alternate strategies and allocations out there. Are any conclusively better in theory or significantly better in performance than the original that Hedgefundie proposed? I haven't been convinced of that
So far nothing with real money since 2019. I ran a modified version of TAA and was a bit ahead before the latest recovery of LTT (have a higher allocation to UPRO than 55%). Now, I'm more or less even with 55/45. In the end, I think because of the high volatility of the individual components, timing of the rebalance period is pretty much up to luck in the last 2+years and may not worth the trouble of running more sophisticated timing strategy. So I'm staying with my modified TAA 'cause why not :oops: :wink:
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

I contend that any defense of quarterly rebalancing via backtesting is essentially overfitting. It does make sense to me, but all the rationalizations I've seen seem weak. The real reason is behavioral: things done on a fixed date become a habit and are easier to follow. More complex rules (rebalancing bands or volatility based adjustments) make more theoretical sense from a portfolio theory standpoint, but are also easier to break and discard. There's also the matter of implementing said complex rules accurately.

So when all's said and done 55/45 quarterly rebalancing is easy to understand and easy to follow. However, I see no evidence that it's optimal.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

OohLaLa wrote: Mon Jul 05, 2021 3:31 pm
perfectuncertainty wrote: Mon Jul 05, 2021 6:58 am
OohLaLa wrote: Sun Jul 04, 2021 11:44 am -I would not suggest either 1 or 2yrs because of the inherent volatility of this strategy and the very real possibility of being seriously derailed from one's risk target. Extreme AAs are no good here.
How long have you been using HFEA?
One year.
But you only joined 3 months ago?
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

perfectuncertainty wrote: Thu Jul 08, 2021 2:28 pm
OohLaLa wrote: Mon Jul 05, 2021 3:31 pm
perfectuncertainty wrote: Mon Jul 05, 2021 6:58 am
OohLaLa wrote: Sun Jul 04, 2021 11:44 am -I would not suggest either 1 or 2yrs because of the inherent volatility of this strategy and the very real possibility of being seriously derailed from one's risk target. Extreme AAs are no good here.
How long have you been using HFEA?
One year.
But you only joined 3 months ago?
Yeah, I lurked for a very long while. Basically went through the two threads, started investing in an HFEA offshoot (TQQQ + TMF), had time to adjust that (add VIX), all before I decided to finally participate on BH.

EDIT: Why are you curious about that, btw? :confused
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dc93
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dc93 »

catdogfrog wrote: Tue Jul 06, 2021 4:48 pm Hi everyone,

I've been participating in this excellent adventure for some time, but its my first time registering and posting.

I have a HFEA thought experiment that I hope that you can help me out with:

We know that a simple Portfolio Visualizer back-test of 55% UPRO, 45% TMF, with quarterly rebalancing gives a GAGR of 34.83% (from Jan 2010 to Jun 2021).

We also know that if you drop the rebalancing completely, the CAGR drops dramatically, in this case to 27.96%.

I have half my HFEA in a tax-sheltered account, and half in a taxable account.

So to avoid triggering taxes when I rebalance every quarter, I am only rebalancing the tax-sheltered account; but when I rebalance, I still factor-in the entire portfolio (taxable and non-taxable) holdings.

For example, if my target portfolio is 55% UPRO and 45% TMF, and if right before rebalancing, the accounts are:

Taxable:
- UPRO: 50%
- TMF: 50%

Tax-sheltered:
- UPRO: 50%
- TMF: 50%

Then after rebalancing, the balances will be:

Taxable:
- UPRO: 50% <- no rebalancing
- TMF: 50% <- no rebalancing

Tax-sheltered:
- UPRO: 60% <- over-compensates for taxable account that won't be rebalanced
- TMF: 40% <- over-compensates for taxable account that won't be rebalanced

So that the overall portfolio after rebalancing will still maintain the target of:
- UPRO: 55%
- TMF: 45%

In theory, the above method should still give the same returns (GAGR of 34.83%) as if my entire portfolio was rebalanced.

So where the thought experiment comes in is as follows:

Given that:
A. Rebalancing an entire portfolio quarterly gave 34.83% CAGR
B. No rebalancing entire portfolio quarterly gave 27.96% CAGR (this is equivalent to my taxable account)
C. My portfolio is comprised half of a no-rebalancing (i.e. 27.96% CAGR) and half of over-compensation rebalancing.

Then wouldn't this mean that my tax-sheltered account is achieving a 41.7% CAGR in order that my overall portfolio still achieves the 34.83% CAGR average?

And if so, then does that mean a more effective means of rebalancing our HFEA portfolios is to over-rebalance ; where the general rule would be:

Target Portfolio (e.g.):
- UPRO: 55%
- TMF: 45%

Portfolio Before Rebalancing:
- UPRO: 55% + X% (e.g. 55% + 10% = 65%)
- TMF: 45% - X% (e.g. 45% - 10% = 35%)

Portfolio After Rebalancing:
- UPRO: 55% - X% (i.e. 55% - 10% = 45%) <- as opposed to 55%
- TMF: 45% + X% (i.e. 55% + 10% = 55%) <- as opposed to 45%

If some of you superstars could chime-in, it would be appreciated.

Thank you.
Hi catdogfrog,
I am a long time lurker and this is my first post too. If I understood your post correctly, this sounds like a really interesting way to make tax-sheltered accounts more useful.
There is one catch, though. (Disclaimer: I haven't run the numbers yet, all of the comments below are based on my intuition).
IIRC, in the long run, UPRO grows much faster than TMF. Let's say you do not make any rebalance in your taxable account - then more likely than not, UPRO will be overweighted (potentially by a lot) in taxable, therefore to implement your strategy, you will need to complement with more TMF in the Roth IRA. Since TMF grows slower than UPRO, that could make your Roth IRA much smaller than it could be (i.e. without your strategy), therefore much less tax-efficient.

Of course, in practice we should take some other factors into consideration. For example, we may add cash flow to the taxable account, which hopefully reduces the amount of rebalance needed in the Roth IRA.

Best,
dc93
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

dc93 wrote: Thu Jul 08, 2021 7:41 pmHi catdogfrog,
I am a long time lurker and this is my first post too. If I understood your post correctly, this sounds like a really interesting way to make tax-sheltered accounts more useful.
There is one catch, though. (Disclaimer: I haven't run the numbers yet, all of the comments below are based on my intuition).
IIRC, in the long run, UPRO grows much faster than TMF. Let's say you do not make any rebalance in your taxable account - then more likely than not, UPRO will be overweighted (potentially by a lot) in taxable, therefore to implement your strategy, you will need to complement with more TMF in the Roth IRA. Since TMF grows slower than UPRO, that could make your Roth IRA much smaller than it could be (i.e. without your strategy), therefore much less tax-efficient.

Of course, in practice we should take some other factors into consideration. For example, we may add cash flow to the taxable account, which hopefully reduces the amount of rebalance needed in the Roth IRA.

Best,
dc93
If I'm understanding correctly, this would only be a problem once the tax-sheltered account ends up needing to be more than 100% weighted toward TMF to account for UPRO's gains in taxable, right? Might be worth doing some modeling to see how long that might take. At some point, the gains would need to be realized anyway (if individual is nearing retirement and/or wants to take a more risk-averse approach and delever their portfolio).

Adding cash flow to the equation will definitely help mitigate this.
Jags4186
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

langlands wrote: Thu Jul 08, 2021 1:39 pm I contend that any defense of quarterly rebalancing via backtesting is essentially overfitting. It does make sense to me, but all the rationalizations I've seen seem weak. The real reason is behavioral: things done on a fixed date become a habit and are easier to follow. More complex rules (rebalancing bands or volatility based adjustments) make more theoretical sense from a portfolio theory standpoint, but are also easier to break and discard. There's also the matter of implementing said complex rules accurately.

So when all's said and done 55/45 quarterly rebalancing is easy to understand and easy to follow. However, I see no evidence that it's optimal.
Correct. Quarterly rebalancing is easy to implement and has in the past given good results. All other methods, IMO, are “perfect is the enemy of good” types of analysis.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Guilty as charged. I think it makes a ton of sense to avoid rebalancing "fast" in relation to the response time of the market. This is a bias introduced by my profession, but I like my bias in this area. Changes in the market take time. To say that there's no fundamental reason for that seems to me something Peter Pan might say. Recovery takes an even longer time, so if you're *late* it's preferable to being too fast.

Quarterly is actually too fast for the interesting downward moves, but it's just right for the 20% sort of downward moves, like for instance the whipsidoodle we got in 4th quarter 2018. We got lucky in that it was timed to fit the calendar. We got lucky in 2020 with a big move that occurred on 20% move timing, with the bottom at 3/23, and that reinforces the overfitting by outperforming, for instance, a rebalance band in that quarter. When you hit a rebalance band, you don't know if the market is going 20% lower. Fortunately, you can overfit the rebalance bands to play the odds based on history, but then you probably would just keep quiet about criticizing the other people for using quarterly rebalancing.

so - will the dynamics of these market moves suddenly speed up by factor of 10? or 100? Why would anybody sane propose that? The fear is always an *even slower* move down. That's all anybody talks about, "Japan", or God forbid, the 1970's, where the downward move takes 15 years.

So, in the end, it's guesswork, but the waves that ripple through the markets in the past are not imaginary. Anybody can look at that and draw his own conclusion. I will continue overfitting.
This time is the same
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dc93
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dc93 »

DMoogle wrote: Fri Jul 09, 2021 9:24 am
dc93 wrote: Thu Jul 08, 2021 7:41 pmHi catdogfrog,
I am a long time lurker and this is my first post too. If I understood your post correctly, this sounds like a really interesting way to make tax-sheltered accounts more useful.
There is one catch, though. (Disclaimer: I haven't run the numbers yet, all of the comments below are based on my intuition).
IIRC, in the long run, UPRO grows much faster than TMF. Let's say you do not make any rebalance in your taxable account - then more likely than not, UPRO will be overweighted (potentially by a lot) in taxable, therefore to implement your strategy, you will need to complement with more TMF in the Roth IRA. Since TMF grows slower than UPRO, that could make your Roth IRA much smaller than it could be (i.e. without your strategy), therefore much less tax-efficient.

Of course, in practice we should take some other factors into consideration. For example, we may add cash flow to the taxable account, which hopefully reduces the amount of rebalance needed in the Roth IRA.

Best,
dc93
If I'm understanding correctly, this would only be a problem once the tax-sheltered account ends up needing to be more than 100% weighted toward TMF to account for UPRO's gains in taxable, right? Might be worth doing some modeling to see how long that might take. At some point, the gains would need to be realized anyway (if individual is nearing retirement and/or wants to take a more risk-averse approach and delever their portfolio).

Adding cash flow to the equation will definitely help mitigate this.
Re tax-sheltered need >100% towards TMF: that's also what I've worried about. So I ran a quick simulation since the inception date of UPRO (2009) to today. Surprisingly (to me), this never happened, and more than 50% of the asset ends up in Roth.

(I haven't plotted the figures yet. Below are just simulation results)
I assume we have two accounts, taxable & Roth IRA. In 2009, we put $10K each in these two accounts.

Baseline: HFEA in Roth with quarterly rebalancing to 55-45.
In 2021, the 10K dollar would become ~404.5K. (40.45x)

catdogfrog's two account balancing strategy: quarterly rebalancing using only Roth account.
In 2021, the end result would be:
Taxable: 265.7K UPRO + 14.8K TMF = 280.6K
Roth: 187.9K UPRO + 340.5K TMF = 528.4K
Total: 453.6K UPRO + 355.3K TMF = 809.0 K
Just for a sanity check, since the >100% TMF scenario did not happen, the total money should just be the 2x of the baseline, which is true here.

As you can see, ~65% of the money ends up in the Roth - which is somewhat surprising to me. Bought more TMF in Roth but ending up with more money...What's the magic behind this?

One possible explanation: Consider a hypothetical scenario when one does quarterly rebalancing on both taxable and Roth - which should make the same amount of total return with this strategy across the two accounts. However, in this strategy we never rebalance on the taxable part - which makes the return on the taxable part lower, and this part of lowered return is transferred to the Roth part since the overall return remains the same.

I am definitely interested to replicate the simulation beyond 2009 - especially the 2008 crisis.

Best,
dc93
Last edited by dc93 on Fri Jul 09, 2021 12:34 pm, edited 1 time in total.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

dc93 wrote: Fri Jul 09, 2021 11:53 amRe tax-sheltered need >100% towards TMF: that's also what I've worried about. So I ran a quick simulation since the inception date of UPRO (2009) to today. Surprisingly (to me), this never happened, and more than 50% of the asset ends up in Roth.
Eh, with only 12 years, it's not super surprising to me (although it's been quite a bull run overall, so maybe a little).
dc93 wrote: Fri Jul 09, 2021 11:53 amAs you can see, ~65% of the money ends up in the Roth - which is somewhat surprising to me. Bought more TMF in Roth but ending up with more money...What's the magic behind this?
This really just demonstrates the strength of UPRO+TMF over UPRO (or TMF) alone. As an example:
Let's say you're 50% in UPRO and 50% in TMF. Also let's say for simplicity purposes that the expected return of UPRO is 15% and the expected value of TMF is 10%. The expected value of a 50/50 portfolio would be 12.5%, right?

Actually, it won't be 12.5%! Because there's a special dynamic here, where, due to the nature of quarterly rebalancing (particularly relevant during crashes), the combined expected value is actually higher than 12.5%. Don't believe me? Compare HFEA performance to 100% UPRO and 100% TMF - you'll see that HFEA return is higher than UPRO or TMF alone over the long run.

I think you could argue that HFEA is, at its core, kind of a market timing strategy... or at least is related to the concept. That's probably why there's so much debate around rebalancing frequency.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
Better lucky than smart.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

jablom wrote: Fri Jul 09, 2021 6:52 pm
taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
ES and ZB indeed. Tested it on paper account as well. Upside is you save on expenses, downside is taxes. But somebody showed way way upthread that the tax drag wasn't as bad as feared.
Better lucky than smart.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

......
Last edited by perfectuncertainty on Sun Jul 11, 2021 9:21 pm, edited 1 time in total.
blackswan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by blackswan »

dc93 wrote: Fri Jul 09, 2021 11:53 am I am definitely interested to replicate the simulation beyond 2009 - especially the 2008 crisis.
Ask and ye shall receive: 30+ years of UPRO and TMF (and 50 others).
https://gitlab.com/doctorj/quantitative-investing/
blackball
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by blackball »

taojaxx wrote: Fri Jul 09, 2021 7:19 pm
jablom wrote: Fri Jul 09, 2021 6:52 pm
taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
ES and ZB indeed. Tested it on paper account as well. Upside is you save on expenses, downside is taxes. But somebody showed way way upthread that the tax drag wasn't as bad as feared.
I use ES and UB
M1garand30064
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by M1garand30064 »

blackball wrote: Sun Jul 11, 2021 12:45 am
taojaxx wrote: Fri Jul 09, 2021 7:19 pm
jablom wrote: Fri Jul 09, 2021 6:52 pm
taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
ES and ZB indeed. Tested it on paper account as well. Upside is you save on expenses, downside is taxes. But somebody showed way way upthread that the tax drag wasn't as bad as feared.
I use ES and UB
I'm surprised no mutual fund or ETF company has replicated this strategy using futures. My Roth IRA is devoted to this strategy, and I'd love to use futures to reduce expenses and minimize the decay risk, but my account value is not high enough yet to use futures and easily control the amount of leverage.

Wisdomtree, Direxion, Proshares, or PIMCO, are you listening? It would be like PSLDX on steroids.
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

taojaxx wrote: Fri Jul 09, 2021 7:19 pm
jablom wrote: Fri Jul 09, 2021 6:52 pm
taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
ES and ZB indeed. Tested it on paper account as well. Upside is you save on expenses, downside is taxes. But somebody showed way way upthread that the tax drag wasn't as bad as feared.
Mind pointing me in the right direction? I only remember seeing such analysis with regard to LETFs (as explained by Dovahkiin), not futures. As I understand it, if you're doing this in taxable, LETFs and portfolio margin are the only viable forms of leverage available.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

cos wrote: Sun Jul 11, 2021 5:50 pm
Mind pointing me in the right direction? I only remember seeing such analysis with regard to LETFs (as explained by Dovahkiin), not futures. As I understand it, if you're doing this in taxable, LETFs and portfolio margin are the only viable forms of leverage available.
I was referring to Dovahkiin's post. You are correct that it only covers LETFs. Futures remain the most effective scaling technique. If I have to pay taxes on money I make, well, c'est la vie.
Better lucky than smart.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

cos wrote: Sun Jul 11, 2021 5:50 pm
taojaxx wrote: Fri Jul 09, 2021 7:19 pm
jablom wrote: Fri Jul 09, 2021 6:52 pm
taojaxx wrote: Fri Jul 09, 2021 5:10 pm
jablom wrote: Fri Jul 09, 2021 3:27 pm Has anyone tried using futures contracts for the strategy? I've tested on Amibroker and seems to be pretty consistent. Using ES and ZB.
I just started doing this to scale up my HFEA which I run in both taxable and tax sheltered.
So your using ES and ZB to model it? I have been testing it in my paper IB account and also have run the backtests on Amibroker. Seems to work similar but futures always test out different than ETFs.
ES and ZB indeed. Tested it on paper account as well. Upside is you save on expenses, downside is taxes. But somebody showed way way upthread that the tax drag wasn't as bad as feared.
Mind pointing me in the right direction? I only remember seeing such analysis with regard to LETFs (as explained by Dovahkiin), not futures. As I understand it, if you're doing this in taxable, LETFs and portfolio margin are the only viable forms of leverage available.
You can do tax traditional IRA and roth at Interactive Brokers. I trade futures in my Roth, low cost, scalable, don't have to worry about taxes. I tested ES with ZB and UB, I think about similar. UB is "ultra" version and may skew towards bonds. Using one contract of ES and ZB you would be at a 57/43 ratio. ES & UB closer to 50/50. I imagine folks doing it rebalance at expiration? With these two contracts it would be calendar quarter.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

jablom wrote: Mon Jul 12, 2021 12:50 pmYou can do tax traditional IRA and roth at Interactive Brokers. I trade futures in my Roth, low cost, scalable, don't have to worry about taxes. I tested ES with ZB and UB, I think about similar. UB is "ultra" version and may skew towards bonds. Using one contract of ES and ZB you would be at a 57/43 ratio. ES & UB closer to 50/50. I imagine folks doing it rebalance at expiration? With these two contracts it would be calendar quarter.
Futures noob here. Can you elaborate on how you're getting your ratios? If I'm understanding correctly (I'm probably not) ES exposure is 50*S&P price, so one contract exposure is about $220k, whereas one contract of ES and UB exposure is fixed at $100k... right?

I'm probably misunderstanding how to determine exposure from ES and UB contracts. How do you calculate those?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tchoupitoulas »

cos wrote: Thu Jul 08, 2021 11:17 am
Shopcat wrote: Wed Jul 07, 2021 9:30 pm Been lurking, running HFEA for a short period so far, does anyone have a rebalance plan quarterly but also an upper and lower bound that triggers a rebalance? For example if UPRO drops to 40% you would rebalance.
I played with doing that for a bit but ultimately found that it was hurting performance. Just rebalance quarterly, and you'll be fine.
I am doing monthly rebalancing based on the risk parity model used by portfolio visualizer. There was extensive discussion of this and the target vol approach back in the fall of 2019 as I recall. At that time, portfolio visualizer allowed one to upload the simulated data and run backtests on all these ideas going back decades without paying for the premium service. I did that at the time and found that these adaptive allocations improved risk adjusted returns. Like many, I'm doing this in a tax-advantaged account with M1, so there are no tax or transaction costs to worry about. To be sure, this strategy underperformed the OG 40/60 approach by a significant margin in 2020, largely because of the incredibly lucky chance that the absolute bottom of the Covid crisis happened to be just a few days away from the April 1 quarterly rebalance date. That turned out to be a very fortunate time to rebalance and needless to say there's no guarantee that will be the case the next time. Either way, it is certainly true that there are going to be months where the risk parity approach turns out to have been a bad move, and one just has to be comfortable with that.

Here are the backtests with only "live" data, showing that risk parity beat OG 40/60 since 2010.

https://www.portfoliovisualizer.com/bac ... tion2_1=60

https://www.portfoliovisualizer.com/tes ... odWeight=0
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

DMoogle wrote: Mon Jul 12, 2021 1:00 pm
jablom wrote: Mon Jul 12, 2021 12:50 pmYou can do tax traditional IRA and roth at Interactive Brokers. I trade futures in my Roth, low cost, scalable, don't have to worry about taxes. I tested ES with ZB and UB, I think about similar. UB is "ultra" version and may skew towards bonds. Using one contract of ES and ZB you would be at a 57/43 ratio. ES & UB closer to 50/50. I imagine folks doing it rebalance at expiration? With these two contracts it would be calendar quarter.
Futures noob here. Can you elaborate on how you're getting your ratios? If I'm understanding correctly (I'm probably not) ES exposure is 50*S&P price, so one contract exposure is about $220k, whereas one contract of ES and UB exposure is fixed at $100k... right?

I'm probably misunderstanding how to determine exposure from ES and UB contracts. How do you calculate those?
One contract of ES is currently about $219k, ZB is about 162k, UB about 195k. I am just running order is IB to get value estimate then you have maintenance margin/overnight margin. But you could get a lot more market exposure leveraged than UPRO/TMF with just a couple contracts. Scalable means if your comfortable with 2 contracts you could do 10 contracts just as easy. Depending on your balance, confidence in strategy and risk tolerance.
mr_mac3
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by mr_mac3 »

DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
Before I gave up on bonds, I had a portfolio of UPRO and /ZF futures. 90% UPRO/10% cash/810% 5yr treasuries. That makes for 25% stock/75% 5yr treasury leveraged 10.8x. I choose that ratio to get the same duration as 55/45 UPRO/TMF. The leverage was just the max without moving from UPRO to futures. 10% buffer was not enough, I ended up rebalancing about once a month especially during the start of the year. 20% cash reserves would have been easier to maintain with quarterly rebalancing. I used the number of /ZF contracts that would get me closest to my target exposure. I chose /ZF because 2yr treasuries were at basically 0% and the other contracts were much bigger than /ZF in terms of DV01 per contract.
halivingston
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by halivingston »

I jumped in last month with TQQQ 75%, TMF 25%, intend to rebalance in September. Wish me luck!
M1garand30064
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by M1garand30064 »

mr_mac3 wrote: Mon Jul 12, 2021 4:40 pm
DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
Before I gave up on bonds, I had a portfolio of UPRO and /ZF futures. 90% UPRO/10% cash/810% 5yr treasuries. That makes for 25% stock/75% 5yr treasury leveraged 10.8x. I choose that ratio to get the same duration as 55/45 UPRO/TMF. The leverage was just the max without moving from UPRO to futures. 10% buffer was not enough, I ended up rebalancing about once a month especially during the start of the year. 20% cash reserves would have been easier to maintain with quarterly rebalancing. I used the number of /ZF contracts that would get me closest to my target exposure. I chose /ZF because 2yr treasuries were at basically 0% and the other contracts were much bigger than /ZF in terms of DV01 per contract.
Why did you choose to use UPRO instead of MES?
mr_mac3
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by mr_mac3 »

M1garand30064 wrote: Tue Jul 13, 2021 9:20 am
mr_mac3 wrote: Mon Jul 12, 2021 4:40 pm
DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
Before I gave up on bonds, I had a portfolio of UPRO and /ZF futures. 90% UPRO/10% cash/810% 5yr treasuries. That makes for 25% stock/75% 5yr treasury leveraged 10.8x. I choose that ratio to get the same duration as 55/45 UPRO/TMF. The leverage was just the max without moving from UPRO to futures. 10% buffer was not enough, I ended up rebalancing about once a month especially during the start of the year. 20% cash reserves would have been easier to maintain with quarterly rebalancing. I used the number of /ZF contracts that would get me closest to my target exposure. I chose /ZF because 2yr treasuries were at basically 0% and the other contracts were much bigger than /ZF in terms of DV01 per contract.
Why did you choose to use UPRO instead of MES?
I was using futures for the first time so I was a little afraid of equity futures. Also I figured it would be less work to maintain since it would partially rebalance itself. I also thought it would be more tax efficient but I was too lazy to prove/disprove it.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

jablom wrote: Mon Jul 12, 2021 2:16 pmOne contract of ES is currently about $219k, ZB is about 162k, UB about 195k. I am just running order is IB to get value estimate then you have maintenance margin/overnight margin. But you could get a lot more market exposure leveraged than UPRO/TMF with just a couple contracts. Scalable means if your comfortable with 2 contracts you could do 10 contracts just as easy. Depending on your balance, confidence in strategy and risk tolerance.
Ah OK, I mixed up face value at maturity with the price. So let's say I was long on one ES contract and one UB contract using the figures above. That would be $414k total exposure at a 53/47 stock:LTT ratio. $414k divided by 3 is $138k, so if my account had a cash balance of $138k with those two contracts, that would effectively be 3x leveraged, correct?
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

For those running this in a Roth IRA with Interactive Brokers, the IB website says "Futures margin trading in an Individual Retirement Account (IRA) is subject to substantially higher margin requirements than in a non-IRA margin account."
What is the margin requirement applied to ES and ZB/UB in an IB Roth?
Better lucky than smart.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

In my roth it is about 10-11k overnight to hold ES 220k contract for example. I can't tell exactly because I have multiple contracts but I remember it being about that.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

DMoogle wrote: Wed Jul 14, 2021 8:33 am
jablom wrote: Mon Jul 12, 2021 2:16 pmOne contract of ES is currently about $219k, ZB is about 162k, UB about 195k. I am just running order is IB to get value estimate then you have maintenance margin/overnight margin. But you could get a lot more market exposure leveraged than UPRO/TMF with just a couple contracts. Scalable means if your comfortable with 2 contracts you could do 10 contracts just as easy. Depending on your balance, confidence in strategy and risk tolerance.
Ah OK, I mixed up face value at maturity with the price. So let's say I was long on one ES contract and one UB contract using the figures above. That would be $414k total exposure at a 53/47 stock:LTT ratio. $414k divided by 3 is $138k, so if my account had a cash balance of $138k with those two contracts, that would effectively be 3x leveraged, correct?
Yes, looking at it that way. But you only need about 20k overnight margin for futures to hold those 2 contracts not 138k like the ETF. You could hold 10 or more contracts if you wanted but I wouldn't
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

halivingston wrote: Tue Jul 13, 2021 8:02 am I jumped in last month with TQQQ 75%, TMF 25%, intend to rebalance in September. Wish me luck!
Good luck! I wish I had more data on market timing entry but from what I can see because of the hedging/offsetting nature it may not matter as much. It would probably be better overall to get in on a 10% S&P correction but who can predict when that will be.
Last edited by jablom on Wed Jul 14, 2021 4:16 pm, edited 1 time in total.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

taojaxx wrote: Wed Jul 14, 2021 2:47 pm For those running this in a Roth IRA with Interactive Brokers, the IB website says "Futures margin trading in an Individual Retirement Account (IRA) is subject to substantially higher margin requirements than in a non-IRA margin account."
What is the margin requirement applied to ES and ZB/UB in an IB Roth?
In my roth it is about 10-11k overnight to hold ES 220k contract for example. I can't tell exactly because I have multiple contracts but I remember it being about that.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

jablom wrote: Wed Jul 14, 2021 4:14 pm
taojaxx wrote: Wed Jul 14, 2021 2:47 pm For those running this in a Roth IRA with Interactive Brokers, the IB website says "Futures margin trading in an Individual Retirement Account (IRA) is subject to substantially higher margin requirements than in a non-IRA margin account."
What is the margin requirement applied to ES and ZB/UB in an IB Roth?
In my roth it is about 10-11k overnight to hold ES 220k contract for example. I can't tell exactly because I have multiple contracts but I remember it being about that.
Thanks. Sounds low as ES this day requires $16,128 initial and $14,662 maintenance in my taxable.
Better lucky than smart.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

taojaxx wrote: Wed Jul 14, 2021 5:49 pm
jablom wrote: Wed Jul 14, 2021 4:14 pm
taojaxx wrote: Wed Jul 14, 2021 2:47 pm For those running this in a Roth IRA with Interactive Brokers, the IB website says "Futures margin trading in an Individual Retirement Account (IRA) is subject to substantially higher margin requirements than in a non-IRA margin account."
What is the margin requirement applied to ES and ZB/UB in an IB Roth?
In my roth it is about 10-11k overnight to hold ES 220k contract for example. I can't tell exactly because I have multiple contracts but I remember it being about that.
Thanks. Sounds low as ES this day requires $16,128 initial and $14,662 maintenance in my taxable.
Your right, it was low - I just bought another ES today in my Roth at close and it is 34k maintenance/overnight and projected look ahead margin about 16k (whatever that means). I thought the bonds were lower for TN and ZB but I could be wrong and that might have been where I thought it was about 11k.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

jablom wrote: Thu Jul 15, 2021 4:03 pm
taojaxx wrote: Wed Jul 14, 2021 5:49 pm
jablom wrote: Wed Jul 14, 2021 4:14 pm
taojaxx wrote: Wed Jul 14, 2021 2:47 pm For those running this in a Roth IRA with Interactive Brokers, the IB website says "Futures margin trading in an Individual Retirement Account (IRA) is subject to substantially higher margin requirements than in a non-IRA margin account."
What is the margin requirement applied to ES and ZB/UB in an IB Roth?
In my roth it is about 10-11k overnight to hold ES 220k contract for example. I can't tell exactly because I have multiple contracts but I remember it being about that.
Thanks. Sounds low as ES this day requires $16,128 initial and $14,662 maintenance in my taxable.
Your right, it was low - I just bought another ES today in my Roth at close and it is 34k maintenance/overnight and projected look ahead margin about 16k (whatever that means). I thought the bonds were lower for TN and ZB but I could be wrong and that might have been where I thought it was about 11k.
OK, sounds right, so about twice the regular margin requirement.
Better lucky than smart.
blackball
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by blackball »

DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
8 ES
7 UB
-18 NG
-29 VIX

Overnight margin $1.1M;
Cash $1.5M;
Leverage 2.8x which is below target of 4x

I rebalance ES and UB on a discretionary basis. Currently underweight on these two. Rotated into EMD in dec and back out into ES in april.

Rebalance monthly for NG and VIX. Haven't found any literature on how to rebalance short positions as normal rebalancing would entail selling low and buying high. So i devised a method of using $3 and 20 as the medium/long term average price and rebalance the number of contracts using these values instead of the futures price.

Been in and out on MGC. Can't seem to find the conviction to keep a position on gold so have missed out on gains the past year.
M1garand30064
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by M1garand30064 »

blackball wrote: Thu Jul 15, 2021 9:27 pm
DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
8 ES
7 UB
-18 NG
-29 VIX

Overnight margin $1.1M;
Cash $1.5M;
Leverage 2.8x which is below target of 4x

I rebalance ES and UB on a discretionary basis. Currently underweight on these two. Rotated into EMD in dec and back out into ES in april.

Rebalance monthly for NG and VIX. Haven't found any literature on how to rebalance short positions as normal rebalancing would entail selling low and buying high. So i devised a method of using $3 and 20 as the medium/long term average price and rebalance the number of contracts using these values instead of the futures price.

Been in and out on MGC. Can't seem to find the conviction to keep a position on gold so have missed out on gains the past year.
What's the rationale for shorting natural gas and VIX futures?
blackball
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by blackball »

M1garand30064 wrote: Thu Jul 15, 2021 10:08 pm
blackball wrote: Thu Jul 15, 2021 9:27 pm
DMoogle wrote: Mon Jul 12, 2021 8:30 am For those using futures: can you elaborate on exactly what your portfolio looks like? Cash reserve, # of contracts of each, rebalancing frequency?
8 ES
7 UB
-18 NG
-29 VIX

Overnight margin $1.1M;
Cash $1.5M;
Leverage 2.8x which is below target of 4x

I rebalance ES and UB on a discretionary basis. Currently underweight on these two. Rotated into EMD in dec and back out into ES in april.

Rebalance monthly for NG and VIX. Haven't found any literature on how to rebalance short positions as normal rebalancing would entail selling low and buying high. So i devised a method of using $3 and 20 as the medium/long term average price and rebalance the number of contracts using these values instead of the futures price.

Been in and out on MGC. Can't seem to find the conviction to keep a position on gold so have missed out on gains the past year.
What's the rationale for shorting natural gas and VIX futures?
Collecting the roll yield with the futures in contango. Although nat gas has switched into slight backwardation this month.
Bulletproof
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Bulletproof »

Remember all those people who said "it's insanity to be in long term treasuries right now, rates can only go up from here". They said it with such confidence and smugness. I'm sitting on some TLT synthetic futures that are up 400%+ right now. I'm here to gloat over the shortsightedness & hypocrisy of "no one knows nothing" bogleheads who just can't help prognosticating on markets (in this case long bond yields) while claiming to be puritanically against the entire idea of predictions. TMF has been doing exactly what it was meant to do also. It's been a glorious sticking with a risk allocation with leverage.
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Bulletproof wrote: Thu Jul 15, 2021 10:44 pm Remember all those people who said "it's insanity to be in long term treasuries right now, rates can only go up from here". They said it with such confidence and smugness. I'm sitting on some TLT synthetic futures that are up 400%+ right now. I'm here to gloat over the shortsightedness & hypocrisy of "no one knows nothing" bogleheads who just can't help prognosticating on markets (in this case long bond yields) while claiming to be puritanically against the entire idea of predictions. TMF has been doing exactly what it was meant to do also. It's been a glorious sticking with a risk allocation with leverage.
Totally agree.You'll probably be issued a Board warning for questioning the party line lol. Puritanically and smugness are the words indeed.
:)
Better lucky than smart.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Bulletproof wrote: Thu Jul 15, 2021 10:44 pm Remember all those people who said "it's insanity to be in long term treasuries right now, rates can only go up from here". They said it with such confidence and smugness. I'm sitting on some TLT synthetic futures that are up 400%+ right now. I'm here to gloat over the shortsightedness & hypocrisy of "no one knows nothing" bogleheads who just can't help prognosticating on markets (in this case long bond yields) while claiming to be puritanically against the entire idea of predictions. TMF has been doing exactly what it was meant to do also. It's been a glorious sticking with a risk allocation with leverage.
Huh? Traditional monthly rebalanced 55/45 is only up 11% YTD (worse than S&P 500) while 55/45 UPRO/CASH is up 25% with substantially less volatility.
tchoupitoulas
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tchoupitoulas »

Semantics wrote: Fri Jul 16, 2021 1:52 am
Bulletproof wrote: Thu Jul 15, 2021 10:44 pm Remember all those people who said "it's insanity to be in long term treasuries right now, rates can only go up from here". They said it with such confidence and smugness. I'm sitting on some TLT synthetic futures that are up 400%+ right now. I'm here to gloat over the shortsightedness & hypocrisy of "no one knows nothing" bogleheads who just can't help prognosticating on markets (in this case long bond yields) while claiming to be puritanically against the entire idea of predictions. TMF has been doing exactly what it was meant to do also. It's been a glorious sticking with a risk allocation with leverage.
Huh? Traditional monthly rebalanced 55/45 is only up 11% YTD (worse than S&P 500) while 55/45 UPRO/CASH is up 25% with substantially less volatility.
Yes but it's up 23% in the past 3 months vs. 8.5% for the S&P. The same thing happened back in early 2019, after Hedgefundie wrote the original post describing the strategy and was met by the same objections that yields could only go up and a 60% allocation to 3x long treasuries was insane.

3 months of performance doesn't much matter in the long run, but it does prove the point that the conventional wisdom is often wrong.
blackball
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by blackball »

I don't get where the +400% came from...
Lock
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lock »

I disagree that TMF has been acting exactly as intentioned for this strategy. Equities and nom bonds have exhibited significant positive correlation as of late.
Semantics
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Joined: Tue Mar 10, 2020 1:42 pm

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

Post by Semantics »

tchoupitoulas wrote: Fri Jul 16, 2021 12:02 pm
Semantics wrote: Fri Jul 16, 2021 1:52 am
Bulletproof wrote: Thu Jul 15, 2021 10:44 pm Remember all those people who said "it's insanity to be in long term treasuries right now, rates can only go up from here". They said it with such confidence and smugness. I'm sitting on some TLT synthetic futures that are up 400%+ right now. I'm here to gloat over the shortsightedness & hypocrisy of "no one knows nothing" bogleheads who just can't help prognosticating on markets (in this case long bond yields) while claiming to be puritanically against the entire idea of predictions. TMF has been doing exactly what it was meant to do also. It's been a glorious sticking with a risk allocation with leverage.
Huh? Traditional monthly rebalanced 55/45 is only up 11% YTD (worse than S&P 500) while 55/45 UPRO/CASH is up 25% with substantially less volatility.
Yes but it's up 23% in the past 3 months vs. 8.5% for the S&P. The same thing happened back in early 2019, after Hedgefundie wrote the original post describing the strategy and was met by the same objections that yields could only go up and a 60% allocation to 3x long treasuries was insane.

3 months of performance doesn't much matter in the long run, but it does prove the point that the conventional wisdom is often wrong.
I don't think the allocation to treasuries is insane, you just have to understand that the expected long-term future returns on the TMF portion are essentially zero, so its main purpose is insurance to smooth out crashes. The 23% bump in Q2 shouldn't mean anything to you, it's going to have quarters like that (or the inverse, Q1) all the time, that's just volatility. Since the expected long-term return of TMF is not much different than if one held cash instead, allocating more toward equities is the 100% rational thing to do right now. This is the whole reason HEDGEFUNDIE himself switched from 40/60 to 55/45.
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