HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

I am not sure portfolio visualizer is accurately showing the risk and potential drawdown? I could be wrong but I do all my testing on Amibroker and buy & hold shows massive drawdowns using UPRO/TMF vs. using ES/ZB. I just ran these back to 2010. I am not an expert at how to look at leverage by any means but I think I would prefer to use my leverage in futures. Something seems off with these triple levered ETFs. You would've been practically wiped out in Feb/Mar of '21 with a trade drawdown of -78%. Futures in that same period was max trade drawdown of -11.1 with overall max trade DD of -34 over the whole period. I would like to use the strategy in my SDB where I do not have access to futures but QQQ/TLT seems much less volatile with CAR of 15.89%, MaxSysDD of -21 and Ulcer Index of 3.01. Unfortunately you won't be levered but I would feel more comfortable. Not sure why portfolio visualizer shows such low MaxSysDD? Maybe Amibroker is off?

ES/ZB CAR 9.01, MaxSysDD = -21%, Ulcer Index 3.08
UPRO/TMF CAR 29.26, MaxSysDD = -63%, Ulcer Index 12.18
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

jablom wrote: Sat Jul 17, 2021 10:16 am I am not sure portfolio visualizer is accurately showing the risk and potential drawdown? I could be wrong but I do all my testing on Amibroker and buy & hold shows massive drawdowns using UPRO/TMF vs. using ES/ZB. I just ran these back to 2010. I am not an expert at how to look at leverage by any means but I think I would prefer to use my leverage in futures. Something seems off with these triple levered ETFs. You would've been practically wiped out in Feb/Mar of '21 with a trade drawdown of -78%. Futures in that same period was max trade drawdown of -11.1 with overall max trade DD of -34 over the whole period. I would like to use the strategy in my SDB where I do not have access to futures but QQQ/TLT seems much less volatile with CAR of 15.89%, MaxSysDD of -21 and Ulcer Index of 3.01. Unfortunately you won't be levered but I would feel more comfortable. Not sure why portfolio visualizer shows such low MaxSysDD? Maybe Amibroker is off?

ES/ZB CAR 9.01, MaxSysDD = -21%, Ulcer Index 3.08
UPRO/TMF CAR 29.26, MaxSysDD = -63%, Ulcer Index 12.18
Buy and hold implies no rebalancing. The strategy requires at least quarterly rebalancing; allocation drift from 2009 to 2020 ends up with UPRO >90% by 2020. Even without rebalancing from 2009 on, the strategy is up 58% from end of 2019 to end of June 2021.

Also, PV only reports monthly returns. Presumably Amibroker is reporting daily values. The biggest 2020 UPRO drawdown was a week before the end of March.
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

jablom wrote: Sat Jul 17, 2021 10:16 am I am not sure portfolio visualizer is accurately showing the risk and potential drawdown? I could be wrong but I do all my testing on Amibroker and buy & hold shows massive drawdowns using UPRO/TMF vs. using ES/ZB. I just ran these back to 2010. I am not an expert at how to look at leverage by any means but I think I would prefer to use my leverage in futures. Something seems off with these triple levered ETFs. You would've been practically wiped out in Feb/Mar of '21 with a trade drawdown of -78%. Futures in that same period was max trade drawdown of -11.1 with overall max trade DD of -34 over the whole period. I would like to use the strategy in my SDB where I do not have access to futures but QQQ/TLT seems much less volatile with CAR of 15.89%, MaxSysDD of -21 and Ulcer Index of 3.01. Unfortunately you won't be levered but I would feel more comfortable. Not sure why portfolio visualizer shows such low MaxSysDD? Maybe Amibroker is off?

ES/ZB CAR 9.01, MaxSysDD = -21%, Ulcer Index 3.08
UPRO/TMF CAR 29.26, MaxSysDD = -63%, Ulcer Index 12.18
PV presents Max Drawdown as a monthly concept (beginning vs end value), not a day-to-day one. Because of this, PV can be very misleading when it comes to performance during flash crashes and very short-lived bears like 2020.

Ex: If the SP500 drops by 50% from March 1st to 7th, then, until the end of the month, recovers half of that loss PV will show a max drawdown of 25%, not 50% (like "common sense" makes you believe).
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

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.
Amen to that :sharebeer
jablom
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jablom »

Hydromod wrote: Sat Jul 17, 2021 11:37 am
jablom wrote: Sat Jul 17, 2021 10:16 am I am not sure portfolio visualizer is accurately showing the risk and potential drawdown? I could be wrong but I do all my testing on Amibroker and buy & hold shows massive drawdowns using UPRO/TMF vs. using ES/ZB. I just ran these back to 2010. I am not an expert at how to look at leverage by any means but I think I would prefer to use my leverage in futures. Something seems off with these triple levered ETFs. You would've been practically wiped out in Feb/Mar of '21 with a trade drawdown of -78%. Futures in that same period was max trade drawdown of -11.1 with overall max trade DD of -34 over the whole period. I would like to use the strategy in my SDB where I do not have access to futures but QQQ/TLT seems much less volatile with CAR of 15.89%, MaxSysDD of -21 and Ulcer Index of 3.01. Unfortunately you won't be levered but I would feel more comfortable. Not sure why portfolio visualizer shows such low MaxSysDD? Maybe Amibroker is off?

ES/ZB CAR 9.01, MaxSysDD = -21%, Ulcer Index 3.08
UPRO/TMF CAR 29.26, MaxSysDD = -63%, Ulcer Index 12.18
Buy and hold implies no rebalancing. The strategy requires at least quarterly rebalancing; allocation drift from 2009 to 2020 ends up with UPRO >90% by 2020. Even without rebalancing from 2009 on, the strategy is up 58% from end of 2019 to end of June 2021.

Also, PV only reports monthly returns. Presumably Amibroker is reporting daily values. The biggest 2020 UPRO drawdown was a week before the end of March.
Thanks for the info. I was not taking into account the quarterly rebalancing and yes Amibroker calculates based on daily returns. I am going to run a test with quarterly rebalancing.
Jags4186
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

Sitting pretty up 0.75% today
danielfp
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danielfp »

If you're worried about inflation and long term bonds, take a look a this chart:

Image

Also, consider that both technological deflation and demographic deflation are things that have been happening for the last 30+ years and just getting stronger. The 30 year long trend in bonds is not ending anytime soon. Hedge funds have max levered short exposure to treasuries, they are getting slaughtered.
FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

FIRE55 wrote: Tue Jul 06, 2021 2:02 pm
Afrofreak wrote: Tue Jul 06, 2021 1:52 pm
I'm sooo close to getting back to breakeven on TMF. Was all the way up above $40 cost basis at one point, bought a whole bunch at $22.80 which ended up being an excellent choice, now my cost basis is down to $28.40.
Nice. I had doubled my money in TMF by July 2020 (cb $22.33, price $44.56). Kept rebalancing, cost basis peaked at $34.08, now down to $30.15. On March 18th I bought a batch of TMF at $21.13, those are doing well. Fascinating.

/FIRE55
Today TMF came back into a tiny profit and triggered my 10% imbalance alert. I sold some TMF @ $30.36 (lot cb $18.45) to buy UPRO at $109.91.

/FIRE55
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

FIRE55 wrote: Mon Jul 19, 2021 11:41 am
FIRE55 wrote: Tue Jul 06, 2021 2:02 pm
Afrofreak wrote: Tue Jul 06, 2021 1:52 pm
I'm sooo close to getting back to breakeven on TMF. Was all the way up above $40 cost basis at one point, bought a whole bunch at $22.80 which ended up being an excellent choice, now my cost basis is down to $28.40.
Nice. I had doubled my money in TMF by July 2020 (cb $22.33, price $44.56). Kept rebalancing, cost basis peaked at $34.08, now down to $30.15. On March 18th I bought a batch of TMF at $21.13, those are doing well. Fascinating.

/FIRE55
Today TMF came back into a tiny profit and triggered my 10% imbalance alert. I sold some TMF @ $30.36 (lot cb $18.45) to buy UPRO at $109.91.

/FIRE55
Nice are you doing this in taxable? One thing that's hitting me hard is I reached the limit of trimming UPRO due to LTCG, and I'm still lobsided at ~70/30 atm. I wonder if it's worth taking the STCG to rebalance when it's like this.
FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

parval wrote: Mon Jul 19, 2021 3:19 pm
FIRE55 wrote: Mon Jul 19, 2021 11:41 am Today TMF came back into a tiny profit and triggered my 10% imbalance alert. I sold some TMF @ $30.36 (lot cb $18.45) to buy UPRO at $109.91.
/FIRE55
Nice are you doing this in taxable? One thing that's hitting me hard is I reached the limit of trimming UPRO due to LTCG, and I'm still lobsided at ~70/30 atm. I wonder if it's worth taking the STCG to rebalance when it's like this.
Yes, in taxable - I just acknowledge the tax drag. I track cost basis and gain accurately and I do watch and try to only sell lots which have been held for >1 year. In fact, I don't think I have had to sell any for STCG. I've been buying batches since early 2019, so many have rolled over. I round up a little here and there when rebalancing to grow a cash balance sufficient to pay the CGT annually.

How long until your next lot rolls over 1 year? I think if it was me, I'd just take the STCG hit.

/FIRE55
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

FIRE55 wrote: Mon Jul 19, 2021 3:54 pm
parval wrote: Mon Jul 19, 2021 3:19 pm
FIRE55 wrote: Mon Jul 19, 2021 11:41 am Today TMF came back into a tiny profit and triggered my 10% imbalance alert. I sold some TMF @ $30.36 (lot cb $18.45) to buy UPRO at $109.91.
/FIRE55
Nice are you doing this in taxable? One thing that's hitting me hard is I reached the limit of trimming UPRO due to LTCG, and I'm still lobsided at ~70/30 atm. I wonder if it's worth taking the STCG to rebalance when it's like this.
Yes, in taxable - I just acknowledge the tax drag. I track cost basis and gain accurately and I do watch and try to only sell lots which have been held for >1 year. In fact, I don't think I have had to sell any for STCG. I've been buying batches since early 2019, so many have rolled over. I round up a little here and there when rebalancing to grow a cash balance sufficient to pay the CGT annually.

How long until your next lot rolls over 1 year? I think if it was me, I'd just take the STCG hit.

/FIRE55
Same I made spreadsheet for entire purchase history (honestly not that many) i was just all-ining every paycheck last yr and tried to sell every share that hits the 1 yr mark as well, just TMF nosedived so much and i didn't buy in so here i am :(
FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

parval wrote: Mon Jul 19, 2021 5:33 pm just TMF nosedived so much and i didn't buy in so here i am :(
Bummer. This really is all about the rebalancing. After rebalancing in March 2020 by selling some TMF at $44.76 to buy UPRO down as far as $20.63, I kept rebalancing by selling UPRO as it took off and buying more and more TMF at ever-decreasing prices down as far as $21.13. Stick to the plan.

/FIRE55
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

FIRE55 wrote: Mon Jul 19, 2021 11:41 am
FIRE55 wrote: Tue Jul 06, 2021 2:02 pm
Afrofreak wrote: Tue Jul 06, 2021 1:52 pm
I'm sooo close to getting back to breakeven on TMF. Was all the way up above $40 cost basis at one point, bought a whole bunch at $22.80 which ended up being an excellent choice, now my cost basis is down to $28.40.
Nice. I had doubled my money in TMF by July 2020 (cb $22.33, price $44.56). Kept rebalancing, cost basis peaked at $34.08, now down to $30.15. On March 18th I bought a batch of TMF at $21.13, those are doing well. Fascinating.

/FIRE55
Today TMF came back into a tiny profit and triggered my 10% imbalance alert. I sold some TMF @ $30.36 (lot cb $18.45) to buy UPRO at $109.91.

/FIRE55
Let's go!! Feels so good to be vindicated. 8-)
FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

FIRE55 wrote: Mon Jun 07, 2021 7:02 pm How should we think systematically about the risk:reward of a HFEA allocation within a "traditional" 60:40 AA? For example;

Code: Select all

60% VTI: 40% BND                    [Jul 2009 - May 2021, q rebal]    =>    CAGR 11.38%   stddev 8.64%

54% VTI: 6% UPRO: 36% BND: 4% TMF   [Jul 2009 - May 2021, q rebal]    =>    CAGR 13.87%   stddev 9.78%

48% VTI: 12% UPRO: 32% BND: 8% TMF  [Jul 2009 - May 2021, q rebal]    =>    CAGR 16.36%   stddev 11.07%
Is it ultimately about human tolerance to the eventual drawdown? How much more would I freak out if my portfolio declined 11% vs. 8%? Risk Parity and Maximization of Sharpe/Sortino Ratio seem to be leading statistical approaches.

Thoughts on a sustainable allocation to HFEA in the real world?

/FIRE55
I've been giving this some more thought. The rebalanced portfolio of negatively correlated assets is the foundation of Modern Portfolio Theory, so I started reading more there. This leads one rapidly to the Tangency Portfolio which is the optimal reward:risk portfolio of assets, aka the optimal Sharpe ratio. Handily, PortfolioVisualiser can easily calculate this portfolio, and - whaddaya know - the Tangency Portfolio for UPRO:TMF is 53:47. So that's nice.

For a "regular" portfolio of SPY:EDV the Tangency Portfolio is 70:30. This results in Expected Return of 13.8%, Expected Volatility of 10.0% for a Sharpe Ratio of 1.25. Not bad.

Asking it to add some UPRO & TMF results in tiny allocations to the LETFs, but does reduce volatility a bit, resulting in 14.2%/8.4%/1.52. So this is the optimal return:risk portfolio combining SPY:EDV:UPRO:TMF. Slightly higher return for slightly lower risk. Nifty.

So now I wanted to know how much reward:risk I want to take? I'd already measured the volatility of SPY:EDV at 10%, so how about the traditional SPY 60:BND 40? 8.0%/9.4%/0.79. Pffft.

What about some Target-Date portfolios? Surely I should see volatility reduce in these over time? Let's look at a few Vanguard's ETFs.

2025: 7.45% / 10.57%

2035: 8.25% / 12.62%

2045: 8.88% / 13.39%

Growth rates are mediocre, as might be expected, but the volatility is surprisingly awful. I somewhat arbitrarily asked where a volatility of 12.5% lies on the Efficient Frontier (slide your mouse along the Efficient Frontier graph until you find stdev of 12.5) and we get a portfolio of SPY 47:EDV 24:UPRO 16:TMF 13 or thereabouts, for an Expected Return of 19.96% at volatility of 12.5% !!! That sounds like a bargain, for a volatility level on par with several Target Date ETFs. Backtest, FWIW.

So - how "reasonable" is it to target 12.5% volatility, given a desire to take on some risk over and above the optimum Sharpe ratio and the ability to basically dial in your given volatility using an allocation of UPRO & TMF?

How about a return of 23.4% at volatility of 15%?

/FIRE55
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Good question. It's certainly the one I thought of. I am still mulling it over.

FWIW, measurement of (for instance) Sharpe Ratios from Jan 2010 (which is the case here) to 2021 are going to make dangerous portfolios look really brilliant compared to sharpe ratios based on data that goes farther back, which the target date funds do.

If you change the dates to January 2010, Target Date 2025 looks like this:
CAGR 9.22
St. Dev 9.52
Sharpe 0.92

That's more apple-to-apples, but again, everybody is a genius in a bull market, so making more accurate comparisons using the time frame 2010 to 2021 would still tell you lots of risk is okay in that period. If only we had a time machine, we'd go 100% UPRO in 2010.
This time is the same
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

firebirdparts wrote: Tue Jul 20, 2021 9:15 am Good question. It's certainly the one I thought of. I am still mulling it over.

FWIW, measurement of (for instance) Sharpe Ratios from Jan 2010 (which is the case here) to 2021 are going to make dangerous portfolios look really brilliant compared to sharpe ratios based on data that goes farther back, which the target date funds do.

If you change the dates to January 2010, Target Date 2025 looks like this:
CAGR 9.22
St. Dev 9.52
Sharpe 0.92

That's more apple-to-apples, but again, everybody is a genius in a bull market, so making more accurate comparisons using the time frame 2010 to 2021 would still tell you lots of risk is okay in that period. If only we had a time machine, we'd go 100% UPRO in 2010.
Not me. 100% TQQQ for me.
Trust
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Trust »

devinbooker wrote: Thu Jun 24, 2021 12:21 am Do folks have opinions on lumpsum-ing or DCA-ing into the 55/45 UPRO/TMF strategy?
I'm converting a large portion of my retirement savings into this strategy and will probably use a trade off. I have about $95,000 currently invested and plan to convert it around $15,000 each time every 3-6 months. Just going all in is too much for me and I have quite a high risk tolerance.
Trust
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Trust »

Hydromod wrote: Tue Jul 20, 2021 10:04 am
Not me. 100% TQQQ for me.
I apologize if this has been answered before, but why are you not investing in TMF?
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Trust wrote: Tue Jul 20, 2021 1:40 pm
Hydromod wrote: Tue Jul 20, 2021 10:04 am
Not me. 100% TQQQ for me.
I apologize if this has been answered before, but why are you not investing in TMF?
He was responding to me about having a time machine. With a time machine, you wouldn't invest the same way.

Which show how badly the point didn't get made. The point is that the period 2010 to 2020 was a big raging bull market and we ought to expect that a lookback in that period, UPRO looks fantastic. You can't just say, based on that, UPRO has risk/reward charactistics such-and-such all the time. There wasn't enough variety.

In general, if you look at the 5000 posts or whatever it is on Hedgefundie's excellent adventure, this wasn't really the topic of discussion. We've had lots of people simulating these investments, had they existed, going back 100 years. There is one thing that makes bond and stock prices fall at the same time, and that is the cost of capital. If interest rates rise, then both sides of the strategy will suffer together.
This time is the same
Trust
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Trust »

firebirdparts wrote: Tue Jul 20, 2021 1:55 pm
He was responding to me about having a time machine. With a time machine, you wouldn't invest the same way.

Which show how badly the point didn't get made. The point is that the period 2010 to 2020 was a big raging bull market and we ought to expect that a lookback in that period, UPRO looks fantastic. You can't just say, based on that, UPRO has risk/reward charactistics such-and-such all the time. There wasn't enough variety.

In general, if you look at the 5000 posts or whatever it is on Hedgefundie's excellent adventure, this wasn't really the topic of discussion. We've had lots of people simulating these investments, had they existed, going back 100 years. There is one thing that makes bond and stock prices fall at the same time, and that is the cost of capital. If interest rates rise, then both sides of the strategy will suffer together.
I see now. Admittedly, I haven't read the entire thread which was why I was asking this question.

TBH , I find myself in the camp that interest rates will not rise as that it's simply not possible at this point. It would wreck the economy and devastate too many peoples lives. Government is also incapable of reducing programs like medicare, social security or the military. There is only one way out of this - Hyperinflation.

That's why I'm so hesitant to even bother with TMF. I'm thinking of allocating 80% to TQQQ/UPRO and 20% to TMF in my portfolio just in case I'm wrong about TMF.

What do you think?
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Sorry for the confusion. Time machines would be wonderful. :moneybag

I'm actually doing something very close to the tangency portfolio with half a dozen 3x funds with relatively low correlation balanced by TMF, using a risk-budget flavor of minimum variance with 3/4 of the total risk assigned to the set of equities and rebalancing frequently enough to reflect changing asset volatility patterns. I think this strategy is probably pretty close to the tangency portfolio.

The thing about this is that asset allocations swing about a fair amount over time (TMF may have swung from 20 to 70 percent at various times), but the strategy would have dropped the portfolio volatility significantly since 1986 without much affecting returns.

This strategy is mainly practical in tax deferred because of frequent rebalancing.
kingsoggy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kingsoggy »

Hello guys,
im trying to make my way through both threads... its alot.

Im very interested in throwing 10k of my roth to try this but like efficientinvestor (is there a way i can private msg him on this forum?) had in the first thread. I have concerns with regards of inflation and want to add 10% or 5% of a leveraged gold fund. so somthing like this:

50 UPRO / 40 TMF / 10 gold leveraged fund.

Did anyone ever look into back tests with throwing gold into the mix? My concern with adding gold is that it may drag it down enough that its not even worth the risk to take this overall strategy.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

kingsoggy wrote: Tue Jul 20, 2021 8:04 pm Hello guys,
im trying to make my way through both threads... its alot.

Im very interested in throwing 10k of my roth to try this but like efficientinvestor (is there a way i can private msg him on this forum?) had in the first thread. I have concerns with regards of inflation and want to add 10% or 5% of a leveraged gold fund. so somthing like this:

50 UPRO / 40 TMF / 10 gold leveraged fund.

Did anyone ever look into back tests with throwing gold into the mix? My concern with adding gold is that it may drag it down enough that its not even worth the risk to take this overall strategy.
I actually started off with 5% UGLD (3x gold) but that ETF is delisted by velocityshare. I'm on a modified version of TAA now. Unless one expect significant inflation on the order of 1970s, it's going to be hard to see the value of gold (especially since you'll have to allocate more due to lack of appropriate leveraged fund). Also, if 1960-1970s inflation do happen, this strategy will underperform significantly. Just my 2 c.
rchmx1
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

kingsoggy wrote: Tue Jul 20, 2021 8:04 pm Hello guys,
im trying to make my way through both threads... its alot.

Im very interested in throwing 10k of my roth to try this but like efficientinvestor (is there a way i can private msg him on this forum?) had in the first thread. I have concerns with regards of inflation and want to add 10% or 5% of a leveraged gold fund. so somthing like this:

50 UPRO / 40 TMF / 10 gold leveraged fund.

Did anyone ever look into back tests with throwing gold into the mix? My concern with adding gold is that it may drag it down enough that its not even worth the risk to take this overall strategy.
Search the forum for topics related to gold as an inflation hedge. Personally speaking, I found it educational. Spoiler alert, I don't view gold as a reliable inflation hedge. YMMV
kingsoggy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kingsoggy »

[/quote]

Search the forum for topics related to gold as an inflation hedge. Personally speaking, I found it educational. Spoiler alert, I don't view gold as a reliable inflation hedge. YMMV
[/quote]

So does the strategy, if one wanted to take this leverage approach, remain just the UPRO / TMF? i feel like i can swallow the fact that this is risky, but not the fact that it has the glaring weakness of not having a fall back for all of the 4 market environments that an all weather type of portfolio takes. In the 2 threads was there ever any heavy discussion regarding a good third addition to help in an inflation environment with rising rates?
rchmx1
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

kingsoggy wrote: Tue Jul 20, 2021 10:53 pm So does the strategy, if one wanted to take this leverage approach, remain just the UPRO / TMF? i feel like i can swallow the fact that this is risky, but not the fact that it has the glaring weakness of not having a fall back for all of the 4 market environments that an all weather type of portfolio takes. In the 2 threads was there ever any heavy discussion regarding a good third addition to help in an inflation environment with rising rates?
Nope, because there haven't been enough instances of serious extended inflation in the US for anyone to come to any kind of meaningful conclusions as to what "a good third option" would be. Without sufficient data, your best option is relegated to a shot in the dark, so it is up to each individual to determine how comfortable they feel taking such an approach. The simple fact is that there is no one thing that you can point to and say, "This has proven to be a reliable inflation hedge." For each thing you might consider, there are just too many other factors beyond inflation, and there has been too little periods of significant inflation in the US, to state with any kind of confidence that yes I've got it, here is my inflation hedge.

I would say that for someone considering entering into this strategy, you're thinking would have to be inline with some basic tenets. That over the long term stocks rise, that there are hugely powerful entities that take very seriously the continued health of the stock market, and that via disciplined rebalancing you can take advantage of risk parity and so weather the storms as the arise, in whatever for them take, inflationary or other types.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

FIRE55 wrote: Mon Jul 19, 2021 10:54 pm So - how "reasonable" is it to target 12.5% volatility, given a desire to take on some risk over and above the optimum Sharpe ratio and the ability to basically dial in your given volatility using an allocation of UPRO & TMF?

How about a return of 23.4% at volatility of 15%?

/FIRE55
If you haven't already, you should check out the following thread: viewtopic.php?t=322366

There are many ways to go about answering the kinds of questions you're asking, but I find Uncorrelated's approach to be the most reasonable.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

kingsoggy wrote: Tue Jul 20, 2021 10:53 pm
So does the strategy, if one wanted to take this leverage approach, remain just the UPRO / TMF? i feel like i can swallow the fact that this is risky, but not the fact that it has the glaring weakness of not having a fall back for all of the 4 market environments that an all weather type of portfolio takes. In the 2 threads was there ever any heavy discussion regarding a good third addition to help in an inflation environment with rising rates?
It's a long 2 threads, and there are many different ways of doing something "similar". Given current global monetary policy, it's not obviously wrong to do the basic version. I would go that far. There was certainly never any consensus to change it a certain way that everybody liked. Hedgefundie changed it on his own to 55/45, but you know, he started the thread.
This time is the same
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

kingsoggy wrote: Tue Jul 20, 2021 10:53 pm So does the strategy, if one wanted to take this leverage approach, remain just the UPRO / TMF? i feel like i can swallow the fact that this is risky, but not the fact that it has the glaring weakness of not having a fall back for all of the 4 market environments that an all weather type of portfolio takes. In the 2 threads was there ever any heavy discussion regarding a good third addition to help in an inflation environment with rising rates?
You might want to look at several takes on different leveraged portfolios at Optimized Portfolio. There are discussions of leveraged All Weather, Permanent, and Golden Butterfly portfolios as well as the HFEA.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

cos wrote: Wed Jul 21, 2021 1:59 am
FIRE55 wrote: Mon Jul 19, 2021 10:54 pm So - how "reasonable" is it to target 12.5% volatility, given a desire to take on some risk over and above the optimum Sharpe ratio and the ability to basically dial in your given volatility using an allocation of UPRO & TMF?

How about a return of 23.4% at volatility of 15%?

/FIRE55
If you haven't already, you should check out the following thread: viewtopic.php?t=322366

There are many ways to go about answering the kinds of questions you're asking, but I find Uncorrelated's approach to be the most reasonable.
Awesome, thanks. I haven't seen Uncorrelated for some time, I missed this post. It looks like my desire to quantify my risk tolerance is exactly what they state 'gamma' to be. In this case, I estimate my gamma at ~2.5, based on

γ=5 corresponds to an asset allocation of 40% stocks, 60% bonds
γ=4 corresponds to an asset allocation of 50% stocks, 50% bonds
γ=3 corresponds to an asset allocation of 65% stocks, 35% bonds
γ=2 corresponds to an asset allocation of 100% stocks
γ=1 corresponds to an asset allocation of 200% stocks
γ=0 corresponds to an asset allocation of infinitely many stocks.

In this system, it looks like gamma of ~2.5 equates to ~15% volatility. Still working through the implications...

/FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

FIRE55 wrote: Wed Jul 21, 2021 7:21 pm
cos wrote: Wed Jul 21, 2021 1:59 am
FIRE55 wrote: Mon Jul 19, 2021 10:54 pm So - how "reasonable" is it to target 12.5% volatility, given a desire to take on some risk over and above the optimum Sharpe ratio and the ability to basically dial in your given volatility using an allocation of UPRO & TMF?

How about a return of 23.4% at volatility of 15%?

/FIRE55
If you haven't already, you should check out the following thread: viewtopic.php?t=322366

There are many ways to go about answering the kinds of questions you're asking, but I find Uncorrelated's approach to be the most reasonable.
Awesome, thanks. I haven't seen Uncorrelated for some time, I missed this post. It looks like my desire to quantify my risk tolerance is exactly what they state 'gamma' to be. In this case, I estimate my gamma at ~2.5, based on

γ=5 corresponds to an asset allocation of 40% stocks, 60% bonds
γ=4 corresponds to an asset allocation of 50% stocks, 50% bonds
γ=3 corresponds to an asset allocation of 65% stocks, 35% bonds
γ=2 corresponds to an asset allocation of 100% stocks
γ=1 corresponds to an asset allocation of 200% stocks
γ=0 corresponds to an asset allocation of infinitely many stocks.

In this system, it looks like gamma of ~2.5 equates to ~15% volatility. Still working through the implications...

/FIRE55
I must admit that I don't fully know the ins and outs and what-have-yous of utility theory. But I don't think volatility per se is the right measure for representing utility, because utility is measuring the tradeoff between risk and reward.

I would interpret "γ=3 corresponds to an asset allocation of 65% stocks, 35% bonds" as saying that the Sharpe ratio (excess return divided by volatility) is approximately 0.66, because that's what 65/35 VFINX/VBMFX (S&P 500/total bond market) delivered since 1986.

This Sharpe ratio is based on monthly returns, which is what PV uses.

Using the same period, this implies

γ=5 corresponds to a Sharpe ratio of 0.77
γ=4 corresponds to a Sharpe ratio of 0.72
γ=3 corresponds to a Sharpe ratio of 0.66
γ=2 corresponds to a Sharpe ratio of 0.57
γ=1 corresponds to a Sharpe ratio of 0.53

Combining 3x VFINX/VUSTX (S&P 500/long-term treasuries) over the same period with monthly rebalance

3x (40/60): Sharpe ratio = 0.77
3x (50/50): Sharpe ratio = 0.76
3x (55/45): Sharpe ratio = 0.75

These Sharpe ratios are a little optimistic, because they don't account for the ER. At the same time, it is possible to improve the Sharpe ratios by a fair margin using adaptive risk parity approaches.

If I understand correctly, even a fairly risk averse investor shouldn't be all that concerned about a properly balanced 3x LETF portfolio.

Please, those who are knowledgeable show me where I'm missing the boat!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

Hydromod wrote: Wed Jul 21, 2021 8:49 pm I must admit that I don't fully know the ins and outs and what-have-yous of utility theory. But I don't think volatility per se is the right measure for representing utility, because utility is measuring the tradeoff between risk and reward.

[...]

Please, those who are knowledgeable show me where I'm missing the boat!
I'm not sure that Sharpe ratio is the best proxy for CRRA utility either. If you'd like to know more, Uncorrelated ventures deeper into the math over here: viewtopic.php?p=5065102#p5065102
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LiveSimple »

Is the HedgeFundie strategy is for tax deferred accounts or in taxable as well.
In taxable see a lot of short term capital gains ??? if we rebalance frequently ?
Invest when you have the money, sell when you need the money, for real life expenses...
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Shopcat »

LiveSimple wrote: Thu Jul 22, 2021 5:53 am Is the HedgeFundie strategy is for tax deferred accounts or in taxable as well.
In taxable see a lot of short term capital gains ??? if we rebalance frequently ?
I believe someone calculated tax drag at only 1.5% earlier in the thread.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

LiveSimple wrote: Thu Jul 22, 2021 5:53 am Is the HedgeFundie strategy is for tax deferred accounts or in taxable as well.
In taxable see a lot of short term capital gains ??? if we rebalance frequently ?
Most are doing it in Roth
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

cos wrote: Thu Jul 22, 2021 1:55 am
Hydromod wrote: Wed Jul 21, 2021 8:49 pm I must admit that I don't fully know the ins and outs and what-have-yous of utility theory. But I don't think volatility per se is the right measure for representing utility, because utility is measuring the tradeoff between risk and reward.

[...]

Please, those who are knowledgeable show me where I'm missing the boat!
I'm not sure that Sharpe ratio is the best proxy for CRRA utility either. If you'd like to know more, Uncorrelated ventures deeper into the math over here: viewtopic.php?p=5065102#p5065102
Ah yes. Basically Uncorrelated is saying that the utility is maximized with the percent of risky assets = (1/γ) Sharpe/sigma, and estimates a calculated Sharpe/sigma = 1.95 for stocks (Sharpe = 0.31, sigma = 0.16).

What I'm getting at is that the entire portfolio could be considered the risky asset, which accounts for internal correlations and risk from both stocks and bonds. So a 100 percent portfolio gives γ = Sharpe/sigma.

With this perspective, over 1987-present

VFINX/VBMFX

100% 40/60: γ = 0.77/0.0666 = 11.6
100% 50/50: γ = 0.71/0.08 = 8.9
100% 65/35: γ = 0.65/0.1 = 6.5
100% 100/0: γ = 0.56/0.153 = 3.7

Note that PV comes up with a Sharpe ratio for 100% VFINX that is nearly twice as large as Uncorrelated calculates, so you should mentally adjust to account for backtesting time period or irregularities in using PV calculations.

Leveraged 3x (not accounting for leverage expenses)

100% 40/60: γ = 0.77/0.241 = 3.2
100% 50/50: γ = 0.76/0.256 = 3
100% 55/45: γ = 0.75/0.27 = 2.8
100% 65/35: γ = 0.7/0.3 = 2.3
100% 100/0: γ = 0.55/0.455 = 1.2

So the 3x 55/45 HFEA allocation mixed with about 40% riskless has about the same γ as a 65/35 portfolio, and the original 3x 40/60 HFEA allocation mixed with 15% riskless has about the same γ as a 100/0 portfolio.

I hope this is a useful way to look at it.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

I'd like to know how these would have performed, were you Japanese investing in Japanese equivalents in the 1980s... any guesses?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

investor.was.here wrote: Thu Jul 22, 2021 12:55 pm I'd like to know how these would have performed, were you Japanese investing in Japanese equivalents in the 1980s... any guesses?
I'm not sure if anyone has done that specific stress test here, but I imagine a strategy like HFEA would not have held up very well. That period in Japan was a very long sideways market, so volatility decay would have been a constant drag on performance.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

investor.was.here wrote: Thu Jul 22, 2021 12:55 pm I'd like to know how these would have performed, were you Japanese investing in Japanese equivalents in the 1980s... any guesses?
I didn't do the backtest but simply based on the chart below I would say it's not devastating (AA #1 is 60% japanese domestic stock and 40% japan treasury). The rebalance bonus should really shine in this case.
Image

A big part of it is due to interest rate drop in Japan.
Image

You should read the amazing piece by Siamond on Japan crisis.

Source:
https://www.bogleheads.org/blog/2017/02 ... se-crisis/
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

cos wrote: Thu Jul 22, 2021 1:55 am I'm not sure that Sharpe ratio is the best proxy for CRRA utility either. If you'd like to know more, Uncorrelated ventures deeper into the math over here: viewtopic.php?p=5065102#p5065102
FWIW, Uncorrelated said "I think a value of 3 is a good starting point for most investors. I personally think I'm a bit more risk tolerant than the average investor, and a lot less likely to panic sell, my risk aversion is between 2 and 3."

/FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

rchmx1 wrote: Thu Jul 22, 2021 1:25 pm
investor.was.here wrote: Thu Jul 22, 2021 12:55 pm I'd like to know how these would have performed, were you Japanese investing in Japanese equivalents in the 1980s... any guesses?
I'm not sure if anyone has done that specific stress test here, but I imagine a strategy like HFEA would not have held up very well. That period in Japan was a very long sideways market, so volatility decay would have been a constant drag on performance.
It likely would have done okay, similar to 2000-2007 in a fairly sideways US market. Volatility drag is a boogeyman, as long as equities and bonds remain uncorrelated 55/45 HFEA behaves more like a 1.65x leveraged fund rather than 3x, so volatility drag is only around 1%.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

Semantics wrote: Thu Jul 22, 2021 2:55 pm It likely would have done okay, similar to 2000-2007 in a fairly sideways US market. Volatility drag is a boogeyman, as long as equities and bonds remain uncorrelated 55/45 HFEA behaves more like a 1.65x leveraged fund rather than 3x, so volatility drag is only around 1%.
Thanks for the correction! I've seen enough posts in these two threads mention how a sideways market is bad for this strategy that I uncritically
assumed that was correct. Glad to have a better sense of the level of concern it should actually be.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

danielfp wrote: Thu Jul 22, 2021 12:34 pm
Hydromod wrote: Thu Jul 22, 2021 10:47 am
danielfp wrote: Thu Jul 22, 2021 9:52 am I wrote a book about passive long term investments using levered ETF strategies way before HedgeFundie started his threads. It has some obvious flaws, - I did not do proper synthetic levered ETFs with adequate historical interest rate costs, and did most simulations using daily rebalancing - but it does include a lot of long term backtests on the matter plus my opinions and views about several different strategies. I haven't shared the link in this forum because I don't want to spam.
I'd be interested. If you don't want to spam, just send me a message with the link.

Thanks.
You can google it, it's called "Passive investing on steriods". As I mentioned it has some obvious limitations, so please don't roast me too hard :happy
Muchas gracias, doctor. :beer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

rchmx1 wrote: Thu Jul 22, 2021 3:07 pm
Semantics wrote: Thu Jul 22, 2021 2:55 pm It likely would have done okay, similar to 2000-2007 in a fairly sideways US market. Volatility drag is a boogeyman, as long as equities and bonds remain uncorrelated 55/45 HFEA behaves more like a 1.65x leveraged fund rather than 3x, so volatility drag is only around 1%.
Thanks for the correction! I've seen enough posts in these two threads mention how a sideways market is bad for this strategy that I uncritically
assumed that was correct. Glad to have a better sense of the level of concern it should actually be.
I think a lot of the concern about volatility drag comes from people looking at 3x funds in isolation, where it's easy to see examples of the LETF underperforming (e.g. in 2018 SPY was -4.5% and UPRO was -25%). For this strategy I think a bear market is a far bigger concern than a sideways market, for obvious reasons.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

FIRE55 wrote: Wed Jul 21, 2021 7:21 pm
cos wrote: Wed Jul 21, 2021 1:59 am
FIRE55 wrote: Mon Jul 19, 2021 10:54 pm So - how "reasonable" is it to target 12.5% volatility, given a desire to take on some risk over and above the optimum Sharpe ratio and the ability to basically dial in your given volatility using an allocation of UPRO & TMF?

How about a return of 23.4% at volatility of 15%?

/FIRE55
If you haven't already, you should check out the following thread: viewtopic.php?t=322366
Awesome, thanks. I haven't seen Uncorrelated for some time, I missed this post. It looks like my desire to quantify my risk tolerance is exactly what they state 'gamma' to be. In this case, I estimate my gamma at ~2.5, based on

γ=5 corresponds to an asset allocation of 40% stocks, 60% bonds
γ=4 corresponds to an asset allocation of 50% stocks, 50% bonds
γ=3 corresponds to an asset allocation of 65% stocks, 35% bonds
γ=2 corresponds to an asset allocation of 100% stocks
γ=1 corresponds to an asset allocation of 200% stocks
γ=0 corresponds to an asset allocation of infinitely many stocks.

In this system, it looks like gamma of ~2.5 equates to ~15% volatility. Still working through the implications...

/FIRE55
This and the other linked thread from Uncorrelated are very useful. I don't profess to grok all the math, but I'll take it as guidance in the absence of any.

Uncorrelated says:

"I think a value of 3 is a good starting point for most investors. I personally think I'm a bit more risk averse than the average investor, and a lot less likely to panic sell, my risk aversion is between 2 and 3", and

"My current asset allocation is around 90% equities, I plan to hold this asset allocation for a very, very long time. Possibly until the day I die. You're right that this makes me significantly more risk tolerant than most investors."

Gamma of ~2.5 is indicating something like ~15% volatility. SPY 90:VBMFX 10 backtests from 1993 at ~13%.

So my interpretation is that an investor of my risk tolerance should be comfortable with volatility around 15%.

/FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

investor.was.here wrote: Thu Jul 22, 2021 12:55 pm I'd like to know how these would have performed, were you Japanese investing in Japanese equivalents in the 1980s... any guesses?
I can already imagine the Japanese alternate-dimension Boglehead posters, posting in the 80s, about having an inflation hedge for "Hejjifando Sugureta Bōken" by investing in Japanese 3x REIT funds... :shock:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

FIRE55 wrote: Thu Jul 22, 2021 4:28 pm This and the other linked thread from Uncorrelated are very useful. I don't profess to grok all the math, but I'll take it as guidance in the absence of any.

Uncorrelated says:

"I think a value of 3 is a good starting point for most investors. I personally think I'm a bit more risk averse than the average investor, and a lot less likely to panic sell, my risk aversion is between 2 and 3", and

"My current asset allocation is around 90% equities, I plan to hold this asset allocation for a very, very long time. Possibly until the day I die. You're right that this makes me significantly more risk tolerant than most investors."

Gamma of ~2.5 is indicating something like ~15% volatility. SPY 90:VBMFX 10 backtests from 1993 at ~13%.

So my interpretation is that an investor of my risk tolerance should be comfortable with volatility around 15%.

/FIRE55
You are forgetting returns in your assessment. Returns are important IMO. Uncorrelated was using Sharpe/volatility as a measure, not volatility in isolation.

From 1987 to present, consider three portfolios:
  1. CAGR = 10.6%, Sharpe 0.58, volatility 13.6% (10K => 320K)
  2. CAGR = 4.27%, Sharpe 0.15, volatility 15.2% (10K => 42K)
  3. CAGR = 13.5%, Sharpe 0.75, volatility 13.6% (10K => 780K)
These have comparable volatility, so by your argument you should be comfortable with all three portfolios.

Do you prefer any of these portfolios anyway?

The portfolios are 90/10 VFINX/VBMFX, gold, and 1.6x 50/50 SPY/TLT.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

Hydromod wrote: Thu Jul 22, 2021 5:27 pm You are forgetting returns in your assessment. Returns are important IMO. Uncorrelated was using Sharpe/volatility as a measure, not volatility in isolation.

From 1987 to present, consider three portfolios:
  1. CAGR = 10.6%, Sharpe 0.58, volatility 13.6% (10K => 320K)
  2. CAGR = 4.27%, Sharpe 0.15, volatility 15.2% (10K => 42K)
  3. CAGR = 13.5%, Sharpe 0.75, volatility 13.6% (10K => 780K)
These have comparable volatility, so by your argument you should be comfortable with all three portfolios.

Do you prefer any of these portfolios anyway?

The portfolios are 90/10 VFINX/VBMFX, gold, and 1.6x 50/50 SPY/TLT.
Absolutely. Here I just wanted to establish a portfolio volatility level which seems "reasonable". This led me to 15% in my case.

Now I try to find a portfolio which integrates UPRO/TMF in a proportion to achieve a portfolio with volatility of 15%.

PV's Efficient Frontier at 15% looks something like

SPY 28: EDV 28:UPRO 28:TMF 16
Expected Return 23.31
Stdev 14.98%
Sharpe Ratio 1.377

Seems aggressive, but statistically sound. I'm aware this one only runs back to 2010.

Here's my attempt to simulate it back to 1999. I could use a cross-check.

/FIRE55
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

FIRE55 wrote: Thu Jul 22, 2021 6:10 pm Absolutely. Here I just wanted to establish a portfolio volatility level which seems "reasonable". This led me to 15% in my case.

Now I try to find a portfolio which integrates UPRO/TMF in a proportion to achieve a portfolio with volatility of 15%.

PV's Efficient Frontier at 15% looks something like

SPY 28: EDV 28:UPRO 28:TMF 16
Expected Return 23.31
Stdev 14.98%
Sharpe Ratio 1.377

Seems aggressive, but statistically sound. I'm aware this one only runs back to 2010.

Here's my attempt to simulate it back to 1999. I could use a cross-check.

/FIRE55
I plugged in SPY/UPRO/TMF/EDV into my risk-budget minimum variance simulator, with synthetic funds going back to 1996. The simulator adjusts allocations every two weeks to keep the risk budget constant. It accounts for covariances but doesn't consider returns. Compared to a fixed allocation, this simulator will generally have a bit smaller volatility (but roughly the same CAGR.

If I set the stock/bond risk ratio to 75/25, I get a CAGR of 20% with volatility of 16%. Average weights are roughly 45/15/25/15 for SPY/UPRO/EDV/TMF.

If I set the stock/bond risk ratio to 50/50, I get a CAGR of 19.8% with volatility of 15.7%. Average weights are roughly 38/12/32/18 for SPY/UPRO/EDV/TMF.

Just for grins, I swapped TQQQ for UPRO. If I set the stock/bond risk ratio to 50/50, I get a CAGR of 22.8% with volatility of 15.9%. Average weights are roughly 40/10/30/20 for SPY/TQQQ/EDV/TMF. You get some diversification benefit because SPY and TQQQ aren't perfectly correlated, as well as the higher return for TQQQ. An approximate test is here.

Expected return is a bit larger than CAGR for these portfolios. Returns from 1996 to 2010 were a bit larger than returns from 2010 to present.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by FIRE55 »

Hydromod wrote: Thu Jul 22, 2021 9:43 pm I plugged in SPY/UPRO/TMF/EDV into my risk-budget minimum variance simulator, with synthetic funds going back to 1996.
...
If I set the stock/bond risk ratio to 75/25, I get a CAGR of 20% with volatility of 16%. Average weights are roughly 45/15/25/15 for SPY/UPRO/EDV/TMF.
...
If I set the stock/bond risk ratio to 50/50, I get a CAGR of 19.8% with volatility of 15.7%. Average weights are roughly 38/12/32/18 for SPY/UPRO/EDV/TMF.

Just for grins, I swapped TQQQ for UPRO. If I set the stock/bond risk ratio to 50/50, I get a CAGR of 22.8% with volatility of 15.9%. Average weights are roughly 40/10/30/20 for SPY/TQQQ/EDV/TMF. You get some diversification benefit because SPY and TQQQ aren't perfectly correlated, as well as the higher return for TQQQ.
OK, so allocations in the order of 30-40% to HFEA are coming out of your models too. Nice. That seems bonkers at first glance, but damn the math seems very plausible. I had maybe 5% or 10% allocations in mind when I started this line of thought.

Hehe. I've been tilting towards TQQQ anyway so VGT 46:EDV 28:TQQQ 16:TMF 9 looks almost too good to be true since 2010. CAGR of ~25% stdev 15%. Max drawdown of only -15% leads to a Sortino ratio of 3.38! I don't have suitable mutual fund proxies to hand to model back any farther right now.

/FIRE55
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