HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by skierincolorado »

investor.was.here wrote: Wed Oct 13, 2021 12:37 pm
skierincolorado wrote: Fri Oct 08, 2021 11:48 am What are the portfolio margin requirements on TYA and TYD? If they are low enough, this might be a reasonable alternative to futures. I also think 45/55 or 50/50 UPRO/TYA will be enough leverage for most people.
CYA also launched, which would cut drawdown. Hard to backtest but using SPD as a guide, something like 49/49/2 UPRO/TYA/CYA. HFEA returns with 3x AWP drawdowns (-35%). Only pays off once a decade but it makes a big difference when it does. Thoughts?
CYA buys S&P500 puts and invests in SVOL which shorts VIX and buys VIX calls. I don't think any income from SVOL would cover the cost of buying puts so CYA will decay. It's probably not very different from just buying puts yourself. Buying the puts is a drag on return. Over a couple decades I would guess buying puts at low strikes would pay off occasionally.

Just a guess but buying puts might pay off if we see mutliple 50% drawdowns in the next two decades. If we only see one or two, the premium you pay might be greater than any return you get.
Last edited by skierincolorado on Wed Oct 13, 2021 1:12 pm, edited 1 time in total.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

km91 wrote: Wed Oct 13, 2021 12:57 pm For those who intend on investing in this strategy with a 10+ year horizon, how do you view the fund level operational risks? Specifically the risk that one of these leveraged ETFs blows up and the NAV goes to $0 during adverse market conditions like what happened with some VIX ETPs a few years ago. Is it possible that a large enough drawdown in the underlying could cause UPRO or TMF to collapse? I guess by definition a 34% drawdown in a single day would wipe the fund out, but what about a more prolonged drawdown of say 60 or 70% over 12 months? Because the funds releverage daily they would never reach $0 NAV but could the resulting 95% loss cause the fund the liquidate?
While it's a possible risk, it's low. Remember, some of the 2x ETFs ran by the fund companies survived 2008/2009 financial crisis so the swaps contract strategy that supports the leverage is actually being well exercised. This is quite different than the VIX ETPs disasters that happened back in 2018.
investor.was.here
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

skierincolorado wrote: Wed Oct 13, 2021 1:09 pm CYA buys S&P500 puts and invests in SVOL which shorts VIX and buys VIX calls. I don't think any income from SVOL would cover the cost of buying puts so CYA will decay. It's probably not very different from just buying puts yourself. Buying the puts is a drag on return. Over a couple decades I would guess buying puts at low strikes would pay off occasionally.

Just a guess but buying puts might pay off if we see mutliple 50% drawdowns in the next two decades. If we only see one or two, the premium you pay might be greater than any return you get.
We're making enough return that we can afford the decay, no?

Yeah, I don't imagine it'd be profitable but that's not the only factor I use in guiding investment decisions. Another is drawdown because I like liquidity. Our reserves go to a balanced fund for this reason, even though they've been there 20yrs. Otherwise, I'd put them in VTI. The 2009 drawdown didn't both me one bit because I only took a 35% drawdown. So, having downside convexity enables me to take more risk than I'd otherwise want to take.
breeze
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by breeze »

jarjarM wrote: Wed Oct 13, 2021 12:51 pm
investor.was.here wrote: Wed Oct 13, 2021 12:37 pm
skierincolorado wrote: Fri Oct 08, 2021 11:48 am What are the portfolio margin requirements on TYA and TYD? If they are low enough, this might be a reasonable alternative to futures. I also think 45/55 or 50/50 UPRO/TYA will be enough leverage for most people.
CYA also launched, which would cut drawdown. Hard to backtest but using SPD as a guide, something like 49/49/2 UPRO/TYA/CYA. HFEA returns with 3x AWP drawdowns (-35%). Only pays off once a decade but it makes a big difference when it does. Thoughts?
I think it'll be interesting to see how much CYA will be a drag on the overall performance. IF it's relatively efficient then it maybe a worthwhile insurance but current history is too short to be a good judgement. Also, beware of the drawdowns from PV, that's monthly only, so actual drawdown for AWP using 3x is higher (I think it's like ~45%) if one simulates back using daily value.
It will be interesting - still very early. CYA is comprised of ~85% SVOL ETF (0.25x leveraged short VIX with long OTM VXX calls to limit downside) which seems to be producing a dividend of ~3.7%, I think this will help alot with drag especially compared to simply rolling VIX options/futures. If they continue to hold SVOL I'd expect it to tank in a crash as well. We'll see where things end up and how much protection this ETF can offer.

Keep in mind that most of CYA's holdings that are not SVOL are SPY puts a year out around 210-225. There's some real blood in the streets before this really prints.

Edit: I see I posted at the same time as others... 85% of the fund is a lot - maybe it works out.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

investor.was.here wrote: Wed Oct 13, 2021 1:17 pm
skierincolorado wrote: Wed Oct 13, 2021 1:09 pm CYA buys S&P500 puts and invests in SVOL which shorts VIX and buys VIX calls. I don't think any income from SVOL would cover the cost of buying puts so CYA will decay. It's probably not very different from just buying puts yourself. Buying the puts is a drag on return. Over a couple decades I would guess buying puts at low strikes would pay off occasionally.

Just a guess but buying puts might pay off if we see mutliple 50% drawdowns in the next two decades. If we only see one or two, the premium you pay might be greater than any return you get.
We're making enough return that we can afford the decay, no?

Yeah, I don't imagine it'd be profitable but that's not the only factor I use in guiding investment decisions. Another is drawdown because I like liquidity. Our reserves go to a balanced fund for this reason, even though they've been there 20yrs. Otherwise, I'd put them in VTI. The 2009 drawdown didn't both me one bit because I only took a 35% drawdown. So, having downside convexity enables me to take more risk than I'd otherwise want to take.
I'm not opposed, it just that there is no free lunch. You'll do well if markets are highly volatile with large drawdowns. You'll do worse if volatility is only moderately above normal, near normal, or below normal.

Buying puts will reduce expected return proportional to risk. The risk and return profile will have very different shapes too. If the range of outcomes was a normal bell curve without puts, you're shifting the whole curve to the left and cutting off the left tail. So while before the expected 10 year return migh thave had a mean of 10% with a +/- 5% standard deviation, now the mean is 7%, but it's no longer a normal distribution because it lacks a left tail.

I think we'd have to backtest it to really try to understand the differences, which is tough. My general understanding is that this kind of downside protection is pretty expensive and seriously eats into returns. In the long-run, it rarely pays off.

Overall, I don't have an opinion one way or the other on buying puts (or CYA) without more backtesting.

What I do have a strong opinion on is having two separate accounts one for HFEA and one for a balanced fund. This is sub-optimal IMO, although it does have some psychological benefits. The portfolio risk/return profile should be looked at for the whole portfolio, and then the most efficient allocation should be decided upon.

The reason HFEA uses UPRO and TMF with their high fees and the poor risk adjusted returns of LTT is that it's the only way to get sufficient leverage without using futures, margin loans, or box spreads for people that want extreme leverage on their entire net worth. You don't want that much leverage, so you can do better.

Instead of 50% HFEA + 50% 60/40 I would combine the bond portion into TYD.

Basically going from 27.5% UPRO, 30% VTI, 22.5% TMF, 20% ITT fund (112.5% stock, 67.5% LTT, 20% ITT) ---- > 27.5% UPRO, 30% VTI, 42.5% TYD (112.5% stock, 127.5% ITT). The latter has much higher expected return than the former, because ITT have much higher risk-adjusted return than LTT.

Basically I would decide on the stock/bond split you want for your entire net worth. Then decide the most efficient way to implement. Unless you need a lot of leverage, you can avoid LTT (TMF) and just take more leverage in the better performing ITT (TYD). The one caveat is that TYD has much lower AUM then TMF. And even for people that do want a lot of leverage, they don't have to use TMF if they are comfortable using futures.


The criteria for owning TMF are

1) You are too lazy to use futures, margin loans, or box spreads
AND either
2) You want a ton of leverage in a balanced strategy (more than 140% of your net worth in stocks plus enough duration in bonds to balance)
3) You don't want to use TYD because of small AUM or some other reason

All others should be avoiding TMF, in my opinion

So for example, if my net worth is 1M and I own 1.2M in stocks, I should not be using TMF - I should be able to get enough leverage from UPRO and TYD.

Honestly, the performance of TMF is so bad I question whether anybody should use it. If someone's not able/willing to get into treasury futures... I'd probably just suggest 55/45 UPRO/TYD.
L2F
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by L2F »

skierincolorado wrote: Wed Oct 13, 2021 2:32 pm
investor.was.here wrote: Wed Oct 13, 2021 1:17 pm
skierincolorado wrote: Wed Oct 13, 2021 1:09 pm CYA buys S&P500 puts and invests in SVOL which shorts VIX and buys VIX calls. I don't think any income from SVOL would cover the cost of buying puts so CYA will decay. It's probably not very different from just buying puts yourself. Buying the puts is a drag on return. Over a couple decades I would guess buying puts at low strikes would pay off occasionally.

Just a guess but buying puts might pay off if we see mutliple 50% drawdowns in the next two decades. If we only see one or two, the premium you pay might be greater than any return you get.
We're making enough return that we can afford the decay, no?

Yeah, I don't imagine it'd be profitable but that's not the only factor I use in guiding investment decisions. Another is drawdown because I like liquidity. Our reserves go to a balanced fund for this reason, even though they've been there 20yrs. Otherwise, I'd put them in VTI. The 2009 drawdown didn't both me one bit because I only took a 35% drawdown. So, having downside convexity enables me to take more risk than I'd otherwise want to take.
I'm not opposed, it just that there is no free lunch. You'll do well if markets are highly volatile with large drawdowns. You'll do worse if volatility is only moderately above normal, near normal, or below normal.

Buying puts will reduce expected return proportional to risk. The risk and return profile will have very different shapes too. If the range of outcomes was a normal bell curve without puts, you're shifting the whole curve to the left and cutting off the left tail. So while before the expected 10 year return migh thave had a mean of 10% with a +/- 5% standard deviation, now the mean is 7%, but it's no longer a normal distribution because it lacks a left tail.

I think we'd have to backtest it to really try to understand the differences, which is tough. My general understanding is that this kind of downside protection is pretty expensive and seriously eats into returns. In the long-run, it rarely pays off.

Overall, I don't have an opinion one way or the other on buying puts (or CYA) without more backtesting.

What I do have a strong opinion on is having two separate accounts one for HFEA and one for a balanced fund. This is sub-optimal IMO, although it does have some psychological benefits. The portfolio risk/return profile should be looked at for the whole portfolio, and then the most efficient allocation should be decided upon.

The reason HFEA uses UPRO and TMF with their high fees and the poor risk adjusted returns of LTT is that it's the only way to get sufficient leverage without using futures, margin loans, or box spreads for people that want extreme leverage on their entire net worth. You don't want that much leverage, so you can do better.

Instead of 50% HFEA + 50% 60/40 I would combine the bond portion into TYD.

Basically going from 27.5% UPRO, 30% VTI, 22.5% TMF, 20% ITT fund (112.5% stock, 67.5% LTT, 20% ITT) ---- > 27.5% UPRO, 30% VTI, 42.5% TYD (112.5% stock, 127.5% ITT). The latter has much higher expected return than the former, because ITT have much higher risk-adjusted return than LTT.

Basically I would decide on the stock/bond split you want for your entire net worth. Then decide the most efficient way to implement. Unless you need a lot of leverage, you can avoid LTT (TMF) and just take more leverage in the better performing ITT (TYD). The one caveat is that TYD has much lower AUM then TMF. And even for people that do want a lot of leverage, they don't have to use TMF if they are comfortable using futures.


The criteria for owning TMF are

1) You are too lazy to use futures, margin loans, or box spreads
AND either
2) You want a ton of leverage in a balanced strategy (more than 140% of your net worth in stocks plus enough duration in bonds to balance)
3) You don't want to use TYD because of small AUM or some other reason

All others should be avoiding TMF, in my opinion

So for example, if my net worth is 1M and I own 1.2M in stocks, I should not be using TMF - I should be able to get enough leverage from UPRO and TYD.

Honestly, the performance of TMF is so bad I question whether anybody should use it. If someone's not able/willing to get into treasury futures... I'd probably just suggest 55/45 UPRO/TYD.
@skierincolorado thanks for such a detailed (as usual) overview.
Regarding laziness to use margin loans as a criteria to own TMF - do you advocate for margin loans/box spreads to leverage both stocks and bonds part of portfolio? Wouldn't it be too much loan, considering target allocation of 112.5/127.5 (so 140% loan)?
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

jarjarM wrote: Wed Oct 13, 2021 1:10 pm
km91 wrote: Wed Oct 13, 2021 12:57 pm For those who intend on investing in this strategy with a 10+ year horizon, how do you view the fund level operational risks? Specifically the risk that one of these leveraged ETFs blows up and the NAV goes to $0 during adverse market conditions like what happened with some VIX ETPs a few years ago. Is it possible that a large enough drawdown in the underlying could cause UPRO or TMF to collapse? I guess by definition a 34% drawdown in a single day would wipe the fund out, but what about a more prolonged drawdown of say 60 or 70% over 12 months? Because the funds releverage daily they would never reach $0 NAV but could the resulting 95% loss cause the fund the liquidate?
While it's a possible risk, it's low. Remember, some of the 2x ETFs ran by the fund companies survived 2008/2009 financial crisis so the swaps contract strategy that supports the leverage is actually being well exercised. This is quite different than the VIX ETPs disasters that happened back in 2018.
The risk is 0, because we have CB level 3 halting markets at -20%. The VIX futures contracts month1 and month2 did shoot up 96% on 2/5/18 and there was no CB because the SPX was only down -4.5% that day (which isn't small but not enough for CB).
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

L2F wrote: Wed Oct 13, 2021 3:25 pm

@skierincolorado thanks for such a detailed (as usual) overview.
Regarding laziness to use margin loans as a criteria to own TMF - do you advocate for margin loans/box spreads to leverage both stocks and bonds part of portfolio? Wouldn't it be too much loan, considering target allocation of 112.5/127.5 (so 140% loan)?
112.5/127.5 stock/ITT could be achieved without margin or futures using UPRO, VTI, and TYD as in the example. Margin, box-spreads, and futures will be the cheaper implementation by far, but at least you avoid TMF and have plenty of bonds to hedge the 112.5 stock allocation.

You can get all the way to 135% stock allocation with plenty of bond hedge using UPRO/TYD. 45/55 UPRO/TYD for example (135/165 stock/ITT).

If more leverage than 135% stock allocation is required you either have to reduce the relative bond hedge and drift slightly from the historical efficient frontier, or use margin or futures. Margin could be used to leverage UPRO and TYD slightly beyond a 135/165 stock/ITT allocation at some brokers in some circumstances. But really, there are so many advantages to using futures at that point, #1 being lower fees.

I would pick the former (drift from efficient frontier) before I used TMF though. So I would go 55/45 UPRO/TYD before going 55/45 UPRO/TMF. Switching to TMF doesn't really get us any closer to the efficient frontier because LTT aren't a significant part of the historical efficient frontier. It's better to stick with TYD, even if we can't get quite enough leverage out of TYD, because ITT are on the historical efficient frontier and LTT aren't.

We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.

The more you look at it, the more that TMF becomes indefensible. Of course this all is only relevant for people who aren't willing/able to use futures.. because futures make the choice very easy... we can get as much bond exposure as we want at the duration we want.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

skierincolorado wrote: Wed Oct 13, 2021 2:32 pm Honestly, the performance of TMF is so bad I question whether anybody should use it. If someone's not able/willing to get into treasury futures... I'd probably just suggest 55/45 UPRO/TYD.
Your ITT posts have convinced me to slowly move over to TYA. It'll take me until Q1 2022 to rebalance to wait out all my LTCG. After a lot of back and forth, I've finally settled on 1:1 VTI/TYA (ie 1:3 VTI/ITT) which approximates the quarter Kelly portfolio and maximizes sharpe. Anybody can tinker around with 1:3 and keep the same sharpe.

https://www.portfoliovisualizer.com/bac ... n10_3=-300

PRTIX has an effective duration of 6.22 which almost perfectly matches ZN today, which TYA holds. TYD has a duration of just over 8 which matches closer to IEF.

I picked TYA over TYD because I'll be using box spreads and targeting overall 200% leverage. Either TYA is not being marketed as a leveraged ETF or it hasn't been updated yet, but there do not appear to be any special margin requirements (yet), which saves 200% in box interest.
investor.was.here
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

skierincolorado wrote: Wed Oct 13, 2021 2:32 pm I'm not opposed, it just that there is no free lunch. You'll do well if markets are highly volatile with large drawdowns. You'll do worse if volatility is only moderately above normal, near normal, or below normal.

Buying puts will reduce expected return proportional to risk. The risk and return profile will have very different shapes too. If the range of outcomes was a normal bell curve without puts, you're shifting the whole curve to the left and cutting off the left tail. So while before the expected 10 year return migh thave had a mean of 10% with a +/- 5% standard deviation, now the mean is 7%, but it's no longer a normal distribution because it lacks a left tail.
That's a good description of the impact. I don't think it's a free lunch at all, Sharpe ratio probably goes down a bit overall even. The goal is to craft a product that meets the the requirements. Dalio includes gold in AWP for a similar reason. Albeit, gold has no explicit drag but has an implicit one from the opportunity cost of including a non-yielding asset in the portfolio. Here gold is about 2x what CYA would be for similar coverage.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm My general understanding is that this kind of downside protection is pretty expensive and seriously eats into returns. In the long-run, it rarely pays off.
Simplify claims that it's cheap, but, they do have a conflict of interest.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm This is sub-optimal IMO, although it does have some psychological benefits. The portfolio risk/return profile should be looked at for the whole portfolio, and then the most efficient allocation should be decided upon.
Mainly, it's for accounting. Easier to think of money in terms of buckets.

But I also recognize that I'm human and there's a learning curve. Isolating assets allows me to try things, without risking all my assets. It's pretty hard to screw up buy and hold.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm The reason HFEA uses UPRO and TMF with their high fees and the poor risk adjusted returns of LTT is that it's the only way to get sufficient leverage without using futures, margin loans, or box spreads for people that want extreme leverage on their entire net worth. You don't want that much leverage, so you can do better.
Hedgefundie actually advocated for 10-15% of portfolio, with a fixed up front investment. Those also sound like good reasons tho. I don't see it come up but I imagine the LETF approach was also picked because the majority of investors (myself included) lack the knowledge and experience to trade with derviatives. And I'd call myself a sophisticated investor. They're simple to employ and widely available.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm Instead of 50% HFEA + 50% 60/40 I would combine the bond portion into TYD.
So, essentially you're reducing a large, unleveraged bond position into a smaller leveraged one?

Idk if it matters but, for me, I'd realize a large amount of gains selling my balanced fund currently. And I can't easily move funds between taxable and non-taxable accounts so I don't think that's a great idea. I do agree that it's more efficient to plan holistically tho.

I'm also considering putting 66% in NTSX instead, generating yield using the other 33% to boost the return of NTSX. There are various options in 8-10% APY range and some much higher, if you get creative.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm 1) You are too lazy to use futures, margin loans, or box spreads
Any tips for how to learn this stuff? I'm thinking, some reading and practice on ThinkOrSwim paper trading. But that's been the big hurdle for me so far. I'm roughly familiar with options but I read your post on reddit for box spreads and I couldn't follow.
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm 3) You don't want to use TYD because of small AUM or some other reason
Leaning towards TYA, despite the lack of data.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

adamhg wrote: Wed Oct 13, 2021 5:07 pm
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm Honestly, the performance of TMF is so bad I question whether anybody should use it. If someone's not able/willing to get into treasury futures... I'd probably just suggest 55/45 UPRO/TYD.
Your ITT posts have convinced me to slowly move over to TYA. It'll take me until Q1 2022 to rebalance to wait out all my LTCG. After a lot of back and forth, I've finally settled on 1:1 VTI/TYA (ie 1:3 VTI/ITT) which approximates the quarter Kelly portfolio and maximizes sharpe. Anybody can tinker around with 1:3 and keep the same sharpe.

https://www.portfoliovisualizer.com/bac ... n10_3=-300

PRTIX has an effective duration of 6.22 which almost perfectly matches ZN today, which TYA holds. TYD has a duration of just over 8 which matches closer to IEF.

I picked TYA over TYD because I'll be using box spreads and targeting overall 200% leverage. Either TYA is not being marketed as a leveraged ETF or it hasn't been updated yet, but there do not appear to be any special margin requirements (yet), which saves 200% in box interest.
Interesting you are comfortable with box-spreads but not futures? Personally I find box-spreds to be trickier.

One correction is that lower margin requirements do not save you margin interest. For example with 100k of equity buying 200k of VTI, if the margin requirement is 50% or 25%, I still am only borrowing 100k. The difference is in how close you are to a margin call. The margin requirement doesn't determine how much you borrow, it determines how much you are *allowed* to borrow.

Also consider whether you would be better off holding VTI on margin or UPRO using less margin. By my calculation UPRO is better than VTI on margin, even with a box spread:

100k UPRO cost:
.9% fee = $900

300k VTI using 200k box-spread margin cost:
.05% fee = $150
.5% financing cost on 200k: $1000
Total = $1150

Have you read the thread I started on ITT? Several of us decided on a much higher ratio of stocks : ITT than 1:3 (closer to 1:1) even though it does not maximize sharpe. There were several reasons for this including
1) future sharpe may not resemble historical sharpe and estimates of future stock vs bond returns
2) sharpe is based on short-term variance, but we care more about variance in 30+ year returns for which stocks have lower variance than bonds
3) most non-retired retail investors don't own a lot of bonds, and there is a cost (psychological and financial) from deviating too far from your peers
4) since 1955 the historical sharpe ratio was more like 1:2 than 1:3
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

investor.was.here wrote: Wed Oct 13, 2021 5:13 pm

Mainly, it's for accounting. Easier to think of money in terms of buckets.

But I also recognize that I'm human and there's a learning curve. Isolating assets allows me to try things, without risking all my assets. It's pretty hard to screw up buy and hold.

Yeah it's definitely an accounting/psychological benefit. But in so far as it drives people into TMF instead of TYD it's likely to hurt performance.
investor.was.here wrote: Wed Oct 13, 2021 5:13 pm Hedgefundie actually advocated for 10-15% of portfolio, with a fixed up front investment. Those also sound like good reasons tho. I don't see it come up but I imagine the LETF approach was also picked because the majority of investors (myself included) lack the knowledge and experience to trade with derviatives. And I'd call myself a sophisticated investor. They're simple to employ and widely available.
Yeah I remember that from the OP which is why I think a lot of people do it like that. A lot of people do more than 10-15% too right. In that example, instead of 10-15% UPRO/TMF they could do 15-20% UPRO/TYD and up the bond portion from 45% to 55%.
investor.was.here wrote: Wed Oct 13, 2021 5:13 pm So, essentially you're reducing a large, unleveraged bond position into a smaller leveraged one?

Idk if it matters but, for me, I'd realize a large amount of gains selling my balanced fund currently. And I can't easily move funds between taxable and non-taxable accounts so I don't think that's a great idea. I do agree that it's more efficient to plan holistically tho.

I'm also considering putting 66% in NTSX instead, generating yield using the other 33% to boost the return of NTSX. There are various options in 8-10% APY range and some much higher, if you get creative.
Well in the example I gave, the UPRO and VTI stay the same. The bond holdings switch from TMF+BND to TYD. So the bonds become more leveraged overall, but with shorter duration. Above I gave some argument for just straight switching from TMF to TYD which would be applicable even if you can't sell the balanced fun.
investor.was.here wrote: Wed Oct 13, 2021 5:13 pm
Any tips for how to learn this stuff? I'm thinking, some reading and practice on ThinkOrSwim paper trading. But that's been the big hurdle for me so far. I'm roughly familiar with options but I read your post on reddit for box spreads and I couldn't follow.
I find the box-spreads trickier to understand than futures really. I assume you've seen the thread on box-spreads, and the thread I started on ITT futures? Other than what's in those threads I'm not sure. It helped me to preview the order at my broker. You can get most of what you need with futures I think so I'd start there. Easier and gets you more of what you need. The only benefit of box-spreads is a slight tax saving in a taxable account when buying equities - but it's nearly a wash. I did the calculation in one of the threads (I think the ITT thread). I don't use box-spreads very much - only for equity leverage in taxable.

Like instead of committing a bunch of capital to TYA or TYD, you just buy a ZF. That frees up more capital for whatever it is you want to do with the equities.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.

The more you look at it, the more that TMF becomes indefensible. Of course this all is only relevant for people who aren't willing/able to use futures.. because futures make the choice very easy... we can get as much bond exposure as we want at the duration we want.
What kind of difference are we talking about between 45% of TYD vs TMF, when used with 55% UPRO for returns since 1955?

I ran an asset class backtest with data going back to start of 1978 - nothing about that backtest - other than slightly lower drawdown - seem particularly convincing that I should switch from TMF to TYD, so maybe something major happened between 1955 to 1978? Sortino ratio was better for long-term treasuries in this case. https://www.portfoliovisualizer.com/bac ... tion3_2=45
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

cflannagan wrote: Wed Oct 13, 2021 5:58 pm
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.

The more you look at it, the more that TMF becomes indefensible. Of course this all is only relevant for people who aren't willing/able to use futures.. because futures make the choice very easy... we can get as much bond exposure as we want at the duration we want.
What kind of difference are we talking about between 45% of TYD vs TMF, when used with 55% UPRO for returns since 1955?

I ran an asset class backtest with data going back to start of 1978 - nothing about that backtest - other than slightly lower drawdown - seem particularly convincing that I should switch from TMF to TYD, so maybe something major happened between 1955 to 1978? Sortino ratio was better for long-term treasuries in this case. https://www.portfoliovisualizer.com/bac ... tion3_2=45
Not much. In Simba, for 1978-present I get .53 and .52 for ITT and LTT. So pretty similar to you (simba factors in borrowing cost, so sharpe is lower but relative result is the same as you). For 1955, the benefit of ITT gets a hair larger - .43 vs .41.

So yeah if you have already committed 100% of your nw to HFEA, switching to TYD won't make much difference, although the backtest is a hair better for TYD (sharpe is better, although CAGR is lower, so if you're really trying to max out leverage and don't care about risk at all - then yeah TMF is better).

If you are already 100% of nw in HFEA, the only substantial improvement available is by switching to futures and going 165/250 stock/ITT.

But if you don't have 100% of nw in HFEA, then one could simply switch to a 45/55 UPRO/TYD strategy and move more of your net-worth in. This would be a substntial improvement over 55/45 UPRO/TMF, with the same level of risk.

For example someone who is 50% HFEA and 50% VTI is really 132.5/67.5 stock/LTT overall. They would be much better off going 44/56 UPRO/TYD, which is 132/168 stock/ITT. Same stock allocation, but 168% ITT instead of 67.5% LTT. Same overall level of risk, much higher returns and sharpe ratio.

https://www.portfoliovisualizer.com/bac ... on4_2=-100
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Investing Lawyer »

adamhg wrote: Wed Oct 13, 2021 5:07 pm
skierincolorado wrote: Wed Oct 13, 2021 2:32 pm Honestly, the performance of TMF is so bad I question whether anybody should use it. If someone's not able/willing to get into treasury futures... I'd probably just suggest 55/45 UPRO/TYD.
Your ITT posts have convinced me to slowly move over to TYA. It'll take me until Q1 2022 to rebalance to wait out all my LTCG. After a lot of back and forth, I've finally settled on 1:1 VTI/TYA (ie 1:3 VTI/ITT) which approximates the quarter Kelly portfolio and maximizes sharpe. Anybody can tinker around with 1:3 and keep the same sharpe.

https://www.portfoliovisualizer.com/bac ... n10_3=-300

PRTIX has an effective duration of 6.22 which almost perfectly matches ZN today, which TYA holds. TYD has a duration of just over 8 which matches closer to IEF.

I picked TYA over TYD because I'll be using box spreads and targeting overall 200% leverage. Either TYA is not being marketed as a leveraged ETF or it hasn't been updated yet, but there do not appear to be any special margin requirements (yet), which saves 200% in box interest.
How does one find out the actual duration of the ZN contract? I've been using IEF to simulate ZN in portfolio visualizer, and based on your post, I should be using PRTIX.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

investor.was.here wrote: Wed Oct 13, 2021 12:05 pm
parval wrote: Wed Oct 06, 2021 8:11 pm I'm in the middle of switching UPRO/TMF to 3x VTI/EDV, but I don't understand why margin requirement matters for UPRO/TMF? They're already 3x, are you margining more on top of that?
Why are you switching and what's the new portfolio like?

I brought up the margin question. My reason is that I have access to high yield, fixed income opportunities that I can use to boost the returns on the portfolio. Deposit $100k in HFEA, borrow $25k, invest at 20% APY, use the income to buy more HFEA. Repeat. Hypothetical numbers for discussion. I have lower and higher paying options, depending on how much risk and work I want to do. Position size and opportunities are also variable.

If nothing else, using it as a substitute for an emergency fund is interesting. We carry a lot of cash currently.
I'm switching UPRO/TMF to VTI/EDV w/ leverage, it's a bit cheaper if you sell boxes vs paying the ER + borrowing costs of the LETFs.

I also have these "fixed income" opportunities that we can't talk about here :)

So I plan to be 2x leveraged in VTI/EV plus 1 more into these other things, so still 3x leveraged overall via portfolio margin.

I'm super anti-cash, but that's a personal thing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

parval wrote: Wed Oct 13, 2021 9:31 pm
investor.was.here wrote: Wed Oct 13, 2021 12:05 pm
parval wrote: Wed Oct 06, 2021 8:11 pm I'm in the middle of switching UPRO/TMF to 3x VTI/EDV, but I don't understand why margin requirement matters for UPRO/TMF? They're already 3x, are you margining more on top of that?
Why are you switching and what's the new portfolio like?

I brought up the margin question. My reason is that I have access to high yield, fixed income opportunities that I can use to boost the returns on the portfolio. Deposit $100k in HFEA, borrow $25k, invest at 20% APY, use the income to buy more HFEA. Repeat. Hypothetical numbers for discussion. I have lower and higher paying options, depending on how much risk and work I want to do. Position size and opportunities are also variable.

If nothing else, using it as a substitute for an emergency fund is interesting. We carry a lot of cash currently.
I'm switching UPRO/TMF to VTI/EDV w/ leverage, it's a bit cheaper if you sell boxes vs paying the ER + borrowing costs of the LETFs.

I also have these "fixed income" opportunities that we can't talk about here :)

So I plan to be 2x leveraged in VTI/EV plus 1 more into these other things, so still 3x leveraged overall via portfolio margin.

I'm super anti-cash, but that's a personal thing.
Cheaper isn't the only thing to consider. Yeah you can get equal duration from owning less EDV. But you aren't getting nearly as much yield as TMF. And much less than TYD.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LTCM »

Investing Lawyer wrote: Wed Oct 13, 2021 8:57 pm
How does one find out the actual duration of the ZN contract? I've been using IEF to simulate ZN in portfolio visualizer, and based on your post, I should be using PRTIX.
https://www.cmegroup.com/tools-informat ... ytics.html
Click on 10 yr in deliverables
Cash DV01 = $66.49
55% VUG - 20% VEA - 20% EDV - 5% BNDX
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Ramjet wrote: Thu Oct 14, 2021 5:50 am
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
Yes it holds up. At 55/45 it's pretty similar to TMF, a hair better depending on the period chosen. If you don't want/need that much leverage, 45/55 UPRO/TYD is much better than 55/45 UPRO/TMF.. it's just not as much leverage. For people who are keeping separate accounts, it definitely makes sense to increase the size of their HFEA account but switch to 45/55 UPRO/TYD. For people who are already 100% invested in HFEA, it's kind of a wash, unless you're willing to get into futures. Personally, I would still go with 55/45 UPRO/TYD over 55/45 UPRO/TMF because even though the sharpe ratio is about the same, the variance in long-term return should be less.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stormcrow »

breeze wrote: Wed Oct 13, 2021 1:29 pm
jarjarM wrote: Wed Oct 13, 2021 12:51 pm
investor.was.here wrote: Wed Oct 13, 2021 12:37 pm
skierincolorado wrote: Fri Oct 08, 2021 11:48 am What are the portfolio margin requirements on TYA and TYD? If they are low enough, this might be a reasonable alternative to futures. I also think 45/55 or 50/50 UPRO/TYA will be enough leverage for most people.
CYA also launched, which would cut drawdown. Hard to backtest but using SPD as a guide, something like 49/49/2 UPRO/TYA/CYA. HFEA returns with 3x AWP drawdowns (-35%). Only pays off once a decade but it makes a big difference when it does. Thoughts?
I think it'll be interesting to see how much CYA will be a drag on the overall performance. IF it's relatively efficient then it maybe a worthwhile insurance but current history is too short to be a good judgement. Also, beware of the drawdowns from PV, that's monthly only, so actual drawdown for AWP using 3x is higher (I think it's like ~45%) if one simulates back using daily value.
It will be interesting - still very early. CYA is comprised of ~85% SVOL ETF (0.25x leveraged short VIX with long OTM VXX calls to limit downside) which seems to be producing a dividend of ~3.7%, I think this will help alot with drag especially compared to simply rolling VIX options/futures. If they continue to hold SVOL I'd expect it to tank in a crash as well. We'll see where things end up and how much protection this ETF can offer.

Keep in mind that most of CYA's holdings that are not SVOL are SPY puts a year out around 210-225. There's some real blood in the streets before this really prints.

Edit: I see I posted at the same time as others... 85% of the fund is a lot - maybe it works out.
This was my thought after reading the prospectus. I could be wrong, but it seems like CYA will tread water at best? In a small to medium spike of volatility, it would seem like SVOL will be hurting, thus decreasing the returns from holding it.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

skierincolorado wrote: Thu Oct 14, 2021 10:09 am
Ramjet wrote: Thu Oct 14, 2021 5:50 am
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
Yes it holds up. At 55/45 it's pretty similar to TMF, a hair better depending on the period chosen. If you don't want/need that much leverage, 45/55 UPRO/TYD is much better than 55/45 UPRO/TMF.. it's just not as much leverage. For people who are keeping separate accounts, it definitely makes sense to increase the size of their HFEA account but switch to 45/55 UPRO/TYD. For people who are already 100% invested in HFEA, it's kind of a wash, unless you're willing to get into futures. Personally, I would still go with 55/45 UPRO/TYD over 55/45 UPRO/TMF because even though the sharpe ratio is about the same, the variance in long-term return should be less.
Since TMF is more uncorrelated than TYD won't you be giving up a larger rebalancing bonus compounded over years and years?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Ramjet wrote: Thu Oct 14, 2021 11:05 am
skierincolorado wrote: Thu Oct 14, 2021 10:09 am
Ramjet wrote: Thu Oct 14, 2021 5:50 am
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
Yes it holds up. At 55/45 it's pretty similar to TMF, a hair better depending on the period chosen. If you don't want/need that much leverage, 45/55 UPRO/TYD is much better than 55/45 UPRO/TMF.. it's just not as much leverage. For people who are keeping separate accounts, it definitely makes sense to increase the size of their HFEA account but switch to 45/55 UPRO/TYD. For people who are already 100% invested in HFEA, it's kind of a wash, unless you're willing to get into futures. Personally, I would still go with 55/45 UPRO/TYD over 55/45 UPRO/TMF because even though the sharpe ratio is about the same, the variance in long-term return should be less.
Since TMF is more uncorrelated than TYD won't you be giving up a larger rebalancing bonus compounded over years and years?
Since 1978, the correlation for ITT is slightly more negative for ITT than LTT (-.12 vs -.11) in Simba's spreadsheet. You just need more for the same impact. It's also not just about the correlation. The bonds contribute to the total return a lot too, and ITT have much better returns than LTT.

If you want a 165% stock allocation, you just have to own more ITT than LTT, which is more than you can get with a LETF, so you need futures.

If you're OK with a 130-140% stock allocation, you can get enough treasuries from UPRO+TYD. (45/55)

55/45 UPRO/TYD has some advantages too. The sharpe is the same as 55/45 UPRO/TMF, or even a hair better. And I think there's a good argument for being heavy on equities. Yeah you could get a higher sharpe ratio by owning more ITT with futures, but the variance in 30 yr returns isn't improved a lot. I'd rather be heavy on equities anyways in case bonds go through a 1963-1982 cycle. The thread started by millenialmillions shows that while bonds benefit the sharpe ratio, they can increase the long-term risk to your portfolio because they of the possibility of rate increase cycle. If that's not a concern though, you can just load up on ITT with futures. Or pick a lower ratio of UPRO to TYD like 45/55 or 40/60. I think few people need more leverage than a 45/55 or 50/50 UPRO/TYD portfolio. Even if they want more, I think there's a strong argument for 55/45 UPRO/TYD over 55/45 UPRO/TMF.

https://www.portfoliovisualizer.com/bac ... on4_2=-335
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

adamhg wrote: Wed Oct 13, 2021 5:07 pm I picked TYA over TYD because I'll be using box spreads and targeting overall 200% leverage. Either TYA is not being marketed as a leveraged ETF or it hasn't been updated yet, but there do not appear to be any special margin requirements (yet), which saves 200% in box interest.
Leveraged etfs have been getting a lot of scrutiny lately. "Efficient" is the new way of saying "leveraged" without using the word. NTSX is wisdomtree's "efficient core" fund. I've bought $50 worth of TYA and I'll see how it behaves. If it works out, I'll move more into it. I like the idea of a low fee leveraged treasury etf that's designed for long term holding.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

I have room in my traditional IRA for HFEA, but no Roth IRA. Debating traditional IRA vs. taxable. Does 30/30/40 UPRO/TQQQ/TMF work in taxable if you're able to rebalance with new contributions for at least the foreseeable future?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

manlymatt83 wrote: Thu Oct 14, 2021 12:59 pm I have room in my traditional IRA for HFEA, but no Roth IRA. Debating traditional IRA vs. taxable. Does 30/30/40 UPRO/TQQQ/TMF work in taxable if you're able to rebalance with new contributions for at least the foreseeable future?
Don't do HFEA in one account and not the other. AA should be looked at holistically. If HFEA is too much risk for you, do a modified less-risky HFEA in both accounts. For example, 45/55 UPRO/TYD. Or 40/50/10 UPRO/TYD/VTI. Two benefits:

1) You take equal risk in both accounts so you don't run the risk of one account doing much better than the other, which could put you in an awkward tax position. What if you put HFEA in taxable and it does really well - you'd wish you had done it in IRA. Or what if you do HFEA in tax advantaged and it does terribly for the first 5 years, and then a change in life-circumstances forces you to abandon ship - you won't be left with much in your IRA. Take equal risk in all accounts, or a tad more in your IRAs since they are more likely to have the longer time horizon.

2) You can use TYD instead of TMF
Last edited by skierincolorado on Thu Oct 14, 2021 1:17 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

skierincolorado wrote: Thu Oct 14, 2021 1:12 pm
manlymatt83 wrote: Thu Oct 14, 2021 12:59 pm I have room in my traditional IRA for HFEA, but no Roth IRA. Debating traditional IRA vs. taxable. Does 30/30/40 UPRO/TQQQ/TMF work in taxable if you're able to rebalance with new contributions for at least the foreseeable future?
Don't do HFEA in one account and not the other. AA should be looked at holistically. If HFEA is too much risk for you, do a modified less-risky HFEA in both accounts. For example, 45/55 UPRO/TYD. Or 40/50/10 UPRO/TYD/VTI. Two benefits:

1) You take equal risk in both accounts so you don't run the risk of one account doing much better than the other, which could put you in an awkward tax position

2) You can use TYD instead of TMF
Ahh got it. So by having some UPRO/TMF in taxable and some in tax advantaged, I'm essentially giving myself more control. Makes sense.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

manlymatt83 wrote: Thu Oct 14, 2021 1:15 pm
skierincolorado wrote: Thu Oct 14, 2021 1:12 pm
manlymatt83 wrote: Thu Oct 14, 2021 12:59 pm I have room in my traditional IRA for HFEA, but no Roth IRA. Debating traditional IRA vs. taxable. Does 30/30/40 UPRO/TQQQ/TMF work in taxable if you're able to rebalance with new contributions for at least the foreseeable future?
Don't do HFEA in one account and not the other. AA should be looked at holistically. If HFEA is too much risk for you, do a modified less-risky HFEA in both accounts. For example, 45/55 UPRO/TYD. Or 40/50/10 UPRO/TYD/VTI. Two benefits:

1) You take equal risk in both accounts so you don't run the risk of one account doing much better than the other, which could put you in an awkward tax position

2) You can use TYD instead of TMF
Ahh got it. So by having some UPRO/TMF in taxable and some in tax advantaged, I'm essentially giving myself more control. Makes sense.
Yeah that's part of it, but the big reason is that doing a modified less risky HFEA allows you to use TYD instead of TMF. You get nearly the return of HFEA, with much less risk.

For example, portfolio 1 has a max drawdown of 52% vs 63% for regular HFEA. Would you be comfortable with doing 100% portfolio 1 in both your IRA and taxable?

https://www.portfoliovisualizer.com/bac ... on4_2=-200
Last edited by skierincolorado on Thu Oct 14, 2021 1:20 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

skierincolorado wrote: Thu Oct 14, 2021 1:17 pm Yeah that's part of it, but the big reason is that doing a modified less risky HFEA allows you to use TYD instead of TMF. You get nearly the return of HFEA, with much less risk.
A little confused. What does TYD have to do with tax advantaged vs. taxable? Couldn't a 100% taxable vs. tax advantaged allocation still do UPRO/TYD? Sorry for the confusion!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

manlymatt83 wrote: Thu Oct 14, 2021 1:19 pm
skierincolorado wrote: Thu Oct 14, 2021 1:17 pm Yeah that's part of it, but the big reason is that doing a modified less risky HFEA allows you to use TYD instead of TMF. You get nearly the return of HFEA, with much less risk.
A little confused. What does TYD have to do with tax advantaged vs. taxable? Couldn't a 100% taxable vs. tax advantaged allocation still do UPRO/TYD? Sorry for the confusion!
Well it sounded like you felt 'regular HFEA' was too much risk to put all of your money into in both accounts.

So by doing the 'modified HFEA' which is less risky (similar risk to 100% equities) perhaps you will feel comfortable putting all of your money, in both accounts, into the 'modified' version which uses a little less UPRO, and TYD instead of TMF.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
Last edited by skierincolorado on Thu Oct 14, 2021 1:23 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

skierincolorado wrote: Thu Oct 14, 2021 1:21 pm
manlymatt83 wrote: Thu Oct 14, 2021 1:19 pm
skierincolorado wrote: Thu Oct 14, 2021 1:17 pm Yeah that's part of it, but the big reason is that doing a modified less risky HFEA allows you to use TYD instead of TMF. You get nearly the return of HFEA, with much less risk.
A little confused. What does TYD have to do with tax advantaged vs. taxable? Couldn't a 100% taxable vs. tax advantaged allocation still do UPRO/TYD? Sorry for the confusion!
Well it sounded like you felt 'regular HFEA' was too much risk to put all of your money into in both accounts.

So by doing the 'modified HFEA' which is less risky (similar risk to 100% equities) perhaps you will feel comfortable putting all of your money, in both accounts, into the 'modified' version which uses a little less UPRO, and TYD instead of TMF.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
Ah! I understand now, thank you. Makes sense.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

manlymatt83 wrote: Thu Oct 14, 2021 1:23 pm
skierincolorado wrote: Thu Oct 14, 2021 1:21 pm
manlymatt83 wrote: Thu Oct 14, 2021 1:19 pm
skierincolorado wrote: Thu Oct 14, 2021 1:17 pm Yeah that's part of it, but the big reason is that doing a modified less risky HFEA allows you to use TYD instead of TMF. You get nearly the return of HFEA, with much less risk.
A little confused. What does TYD have to do with tax advantaged vs. taxable? Couldn't a 100% taxable vs. tax advantaged allocation still do UPRO/TYD? Sorry for the confusion!
Well it sounded like you felt 'regular HFEA' was too much risk to put all of your money into in both accounts.

So by doing the 'modified HFEA' which is less risky (similar risk to 100% equities) perhaps you will feel comfortable putting all of your money, in both accounts, into the 'modified' version which uses a little less UPRO, and TYD instead of TMF.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
Ah! I understand now, thank you. Makes sense.
The main advantage is that 'modified' is better than 'regular' HFEA as seen by the higher sharpe ratio. It's just not quite as leveraged for the people who really want a ton of leverage.


If you think about it if you have a 50k account that is 100% in SPY and another 50k account that is 100% in HFEA, your total asset allocation is 132.5k SPY and 67.5k LTT (long-term treasuries) and -100k Cash (132.5/67.5/-100 SPY/LTT/Cash). Let's test that total allocation vs going 100% 'modified HFEA' in both accounts which is 135/165/-200 SPY/ITT/Cash:

https://www.portfoliovisualizer.com/bac ... on4_2=-100

In other words, when we look at both your IRA and your taxable account combined... you were suggesting the red line, and I am suggesting the blue line. You mght have thought that what you proposed would be safer, since you were only doing HFEA in one account, and the other account is just regular old SPY. But the red line has a 57% max draw down, while doing a 'modified HFEA' in both accounts has a 52% max-drawdown.

Some people go 100% regular HFEA with all their money. If they want that much leverage, but using ITT instead of LTT, they would need to use futures contracts instead of TYD. Since you don't seem to be planning on using that much leverage, you can get all the leverage you need out of UPRO and TYD. Futures would still be lower fees of course.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

Looks like TYA isn't available in M1Finance yet. Any guesses when they'll add it?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jdinatale »

Nice blowout day for UPRO. When was the last time we were up over 5% in a day?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

jdinatale wrote: Thu Oct 14, 2021 3:52 pm Nice blowout day for UPRO. When was the last time we were up over 5% in a day?
And another one of those "whenever UPRO and TMF moves in the same direction, it's usually up" days.
investor.was.here
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Joined: Thu Oct 08, 2020 2:52 am

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

Post by investor.was.here »

skierincolorado wrote: Thu Oct 14, 2021 1:35 pm Some people go 100% regular HFEA with all their money. If they want that much leverage, but using ITT instead of LTT, they would need to use futures contracts instead of TYD. Since you don't seem to be planning on using that much leverage, you can get all the leverage you need out of UPRO and TYD. Futures would still be lower fees of course.
I've gone through some of your posts. Real useful perspective, thanks for sharing.

I've been following the HFEA threads for a while and they're difficult to navigate. We all have different backgrounds and most of us are not seasoned traders. To even understand the alternatives, requires reading many posts. To me, the original 55/45 UPRO/TMF proposal is still the one with consensus - that is, the best one-size-fits all portfolio that passerby's can take away.

That being said, I'd like to do better but am struggling to figure out how. I just watched some futures trading videos but am lost about how to implement HFEA using them. It'd be really useful if someone could create a tutorial (here or another thread linked here) on how to do this.

I skimmed a few tutorials on youtube and here's some questions I have, that such a tutorial might answer:
  • is this something I can reasonably learn and in how much time?
  • ok, skip all the content on futures that's not indices...
  • how do I implement leverage? looks like margin so far.
  • what broker should I start with and what do I need to apply for?
  • I see there are different contracts for different indices. I see S&P500 but I don't see ITT. Which is it?
  • I see the contracts have end dates. Does the effective leverage change as we approach the date? Seems like it should. Wait, someone mentioned CYA holds ZN. It's got a month but no year - that doesn't make sense.
  • I see a bunch of dates (on barcharts) but only two that seem to have volume for it: Dec and Mar. Which do I buy and how do I hold them? I'm guessing, the idea is to roll these over.
  • I see the math isn't straight forward. I need to learn what ticks and points are, to know what to buy. How will I track the value of my portfolio? Probably my broker does that for me, but I haven't tried it yet. Not hard to learn but I also don't understand why it's done this way yet.
  • Do I buy macros or minis? What's a contract size? The number seems too small in the volumes. Must be bundles, like options. These questions should have been answered in my tutorial but wasn't.
  • Taxes weren't covered. Wouldn't rolling futures be tax inefficient? Compared to buy/hold TMF
What I still can't tell:
  • It looks daunting but really, it's not that bad. One weekend and you'll be on your feet.
  • It's not that bad but you won't really get it until you practice. Focus on paper trading for a bit.
  • You'll never learn it, if you don't do it professionally
  • You can learn it but it's risky and you can really screw yourself over learning
  • Hard to learn but the relevant parts aren't so bad, if someone here writes the right tutorial for it
NMBob
Posts: 461
Joined: Thu Apr 23, 2015 8:13 pm

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

Post by NMBob »

Ramjet wrote: Thu Oct 14, 2021 11:05 am
skierincolorado wrote: Thu Oct 14, 2021 10:09 am
Ramjet wrote: Thu Oct 14, 2021 5:50 am
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
Yes it holds up. At 55/45 it's pretty similar to TMF, a hair better depending on the period chosen. If you don't want/need that much leverage, 45/55 UPRO/TYD is much better than 55/45 UPRO/TMF.. it's just not as much leverage. For people who are keeping separate accounts, it definitely makes sense to increase the size of their HFEA account but switch to 45/55 UPRO/TYD. For people who are already 100% invested in HFEA, it's kind of a wash, unless you're willing to get into futures. Personally, I would still go with 55/45 UPRO/TYD over 55/45 UPRO/TMF because even though the sharpe ratio is about the same, the variance in long-term return should be less.
Since TMF is more uncorrelated than TYD won't you be giving up a larger rebalancing bonus compounded over years and years?
good question. feb 20 to nov 20 with quarterly rebalance below.

https://www.portfoliovisualizer.com/bac ... tion3_2=45
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

investor.was.here wrote: Thu Oct 14, 2021 4:14 pm
skierincolorado wrote: Thu Oct 14, 2021 1:35 pm Some people go 100% regular HFEA with all their money. If they want that much leverage, but using ITT instead of LTT, they would need to use futures contracts instead of TYD. Since you don't seem to be planning on using that much leverage, you can get all the leverage you need out of UPRO and TYD. Futures would still be lower fees of course.
I've gone through some of your posts. Real useful perspective, thanks for sharing.

I've been following the HFEA threads for a while and they're difficult to navigate. We all have different backgrounds and most of us are not seasoned traders. To even understand the alternatives, requires reading many posts. To me, the original 55/45 UPRO/TMF proposal is still the one with consensus - that is, the best one-size-fits all portfolio that passerby's can take away.

That being said, I'd like to do better but am struggling to figure out how. I just watched some futures trading videos but am lost about how to implement HFEA using them. It'd be really useful if someone could create a tutorial (here or another thread linked here) on how to do this.

I skimmed a few tutorials on youtube and here's some questions I have, that such a tutorial might answer:
  • is this something I can reasonably learn and in how much time?
  • ok, skip all the content on futures that's not indices...
  • how do I implement leverage? looks like margin so far.
  • what broker should I start with and what do I need to apply for?
  • I see there are different contracts for different indices. I see S&P500 but I don't see ITT. Which is it?
  • I see the contracts have end dates. Does the effective leverage change as we approach the date? Seems like it should. Wait, someone mentioned CYA holds ZN. It's got a month but no year - that doesn't make sense.
  • I see a bunch of dates (on barcharts) but only two that seem to have volume for it: Dec and Mar. Which do I buy and how do I hold them? I'm guessing, the idea is to roll these over.
  • I see the math isn't straight forward. I need to learn what ticks and points are, to know what to buy. How will I track the value of my portfolio? Probably my broker does that for me, but I haven't tried it yet. Not hard to learn but I also don't understand why it's done this way yet.
  • Do I buy macros or minis? What's a contract size? The number seems too small in the volumes. Must be bundles, like options. These questions should have been answered in my tutorial but wasn't.
  • Taxes weren't covered. Wouldn't rolling futures be tax inefficient? Compared to buy/hold TMF
What I still can't tell:
  • It looks daunting but really, it's not that bad. One weekend and you'll be on your feet.
  • It's not that bad but you won't really get it until you practice. Focus on paper trading for a bit.
  • You'll never learn it, if you don't do it professionally
  • You can learn it but it's risky and you can really screw yourself over learning
  • Hard to learn but the relevant parts aren't so bad, if someone here writes the right tutorial for it
This is a great list, I will write something up soon. Some of these might be answered in the ITT thread I started, but not all obviously.

In terms of how hard, I would say something between

[*] It looks daunting but really, it's not that bad. One weekend and you'll be on your feet.

and


[*] Hard to learn but the relevant parts aren't so bad, if someone here writes the right tutorial for it

There are people I know personally that trust me that know very little about finance who I've explained the basics to, shown them what buttons to press on Interactive Brokers, and are happily rolling a single MES contract each quarter without my help now. It would obviously be a bad idea to not understand and not know what one is doing, but they are mostly independent now without a lot of background and without a ton of help.


What helped me is to understand the basics of what a futures contract is and the context within an efficient market hypothesis. For example, I still can't break out a calculator and calculate the implied financing on a Treasury future. I can for an S&P500 future because the calculation is easier. But honestly, even if I didn't know how to calculate either, I would still be completely confident in investing in futures. These are market based instruments. The market is efficient. I've looked at studies that show what the historical financing costs have been, even during periods of financial stress, and am satisfied that the rate is very near LIBOR. Banks sell futures contracts as a source of risk-free income that has a rate very near, or a hair higher, than what they would get for keeping deposits on reserve at the Fed.

Obviously you do have to know some basics. Like how much exposure a contract is giving you and to what it is exposing you. What date contract to buy and when to roll.
investor.was.here
Posts: 88
Joined: Thu Oct 08, 2020 2:52 am

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

Post by investor.was.here »

skierincolorado wrote: Thu Oct 14, 2021 4:39 pm This is a great list, I will write something up soon. Some of these might be answered in the ITT thread I started, but not all obviously.
Awesome! I look forward to it.

Let's call it "SKIERINCOLORADO's excellent adventure". That'll make it clear there's something concrete and simple for us to follow. I'd suggest boiling it down to a single, one-size-fits all recommendation with an ELI5 on how to implement it and the basics of futures. Better to include visuals in addition to the link (as HF did), to increase the visual weight of the post.

You've mentioned HFEA using ITT futures a few times but stopped short of recommending it. Maybe that?

Idk how many people picked up on that detail but after watching squid games, I'm a bit more nervous about touching futures myself lol (one of the characters ends up in the game because he was financially ruined by trading futures).
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

investor.was.here wrote: Thu Oct 14, 2021 5:14 pm
skierincolorado wrote: Thu Oct 14, 2021 4:39 pm This is a great list, I will write something up soon. Some of these might be answered in the ITT thread I started, but not all obviously.
Awesome! I look forward to it.

Let's call it "SKIERINCOLORADO's excellent adventure". That'll make it clear there's something concrete and simple for us to follow. I'd suggest boiling it down to a single, one-size-fits all recommendation with an ELI5 on how to implement it and the basics of futures. Better to include visuals in addition to the link (as HF did), to increase the visual weight of the post.

You've mentioned HFEA using ITT futures a few times but stopped short of recommending it. Maybe that?

Idk how many people picked up on that detail but after watching squid games, I'm a bit more nervous about touching futures myself lol (one of the characters ends up in the game because he was financially ruined by trading futures).
That's sort of what I intended the original post in this thread to be: viewtopic.php?f=10&t=357281

But I didn't include as much of the implementation details as you are talking about. I might edit the OP in that thread, or link to a post in the OP. Millenialmillions started another thread for a very similar topic, and he suggested we start using my thread as the main thread for all things related to modified HFEA with ITT and futures.

I saw that scene from squid games too haha. It is pretty amazing how much leverage brokers will let you take in futures. Like if somebody wanted to YOLO on an index fund, futures are the way to go. I guess the WSB crowd is more into out of the money call options on individual stocks though.
Last edited by skierincolorado on Thu Oct 14, 2021 5:27 pm, edited 2 times in total.
jarjarM
Posts: 2502
Joined: Mon Jul 16, 2018 1:21 pm

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

Post by jarjarM »

investor.was.here wrote: Thu Oct 14, 2021 5:14 pm Idk how many people picked up on that detail but after watching squid games, I'm a bit more nervous about touching futures myself lol (one of the characters ends up in the game because he was financially ruined by trading futures).
But we don't know if Sang-woo is trading ZN or ES or some other forms of more risky derivative though :P
parval
Posts: 153
Joined: Tue Oct 22, 2019 9:23 pm

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

Post by parval »

skierincolorado wrote: Wed Oct 13, 2021 10:13 pm
parval wrote: Wed Oct 13, 2021 9:31 pm
investor.was.here wrote: Wed Oct 13, 2021 12:05 pm
parval wrote: Wed Oct 06, 2021 8:11 pm I'm in the middle of switching UPRO/TMF to 3x VTI/EDV, but I don't understand why margin requirement matters for UPRO/TMF? They're already 3x, are you margining more on top of that?
Why are you switching and what's the new portfolio like?

I brought up the margin question. My reason is that I have access to high yield, fixed income opportunities that I can use to boost the returns on the portfolio. Deposit $100k in HFEA, borrow $25k, invest at 20% APY, use the income to buy more HFEA. Repeat. Hypothetical numbers for discussion. I have lower and higher paying options, depending on how much risk and work I want to do. Position size and opportunities are also variable.

If nothing else, using it as a substitute for an emergency fund is interesting. We carry a lot of cash currently.
I'm switching UPRO/TMF to VTI/EDV w/ leverage, it's a bit cheaper if you sell boxes vs paying the ER + borrowing costs of the LETFs.

I also have these "fixed income" opportunities that we can't talk about here :)

So I plan to be 2x leveraged in VTI/EV plus 1 more into these other things, so still 3x leveraged overall via portfolio margin.

I'm super anti-cash, but that's a personal thing.
Cheaper isn't the only thing to consider. Yeah you can get equal duration from owning less EDV. But you aren't getting nearly as much yield as TMF. And much less than TYD.
I thought it's a wash in total returns between 3x EDV and TMF, and in that case you want less yield to pay less taxes?
Ramjet
Posts: 1464
Joined: Thu Feb 06, 2020 10:45 am

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

Post by Ramjet »

NMBob wrote: Thu Oct 14, 2021 4:35 pm
Ramjet wrote: Thu Oct 14, 2021 11:05 am
skierincolorado wrote: Thu Oct 14, 2021 10:09 am
Ramjet wrote: Thu Oct 14, 2021 5:50 am
skierincolorado wrote: Wed Oct 13, 2021 4:42 pm We can see this in Simba's spreadsheet. Since 1955:

55/45 UPRO/TYD has the same CAGR and lower stdev and low max-drawdown than UPRO/TMF.
What does the comparison look like from the 1980's to present (after Fed policy change)?

What about TMF vs TYD for the worst months of the GFC in 2008 and the Dot.com bubble in the 2000's?

I am worried about crashes, specifically. Does TYD hold up as crash insurance?
Yes it holds up. At 55/45 it's pretty similar to TMF, a hair better depending on the period chosen. If you don't want/need that much leverage, 45/55 UPRO/TYD is much better than 55/45 UPRO/TMF.. it's just not as much leverage. For people who are keeping separate accounts, it definitely makes sense to increase the size of their HFEA account but switch to 45/55 UPRO/TYD. For people who are already 100% invested in HFEA, it's kind of a wash, unless you're willing to get into futures. Personally, I would still go with 55/45 UPRO/TYD over 55/45 UPRO/TMF because even though the sharpe ratio is about the same, the variance in long-term return should be less.
Since TMF is more uncorrelated than TYD won't you be giving up a larger rebalancing bonus compounded over years and years?
good question. feb 20 to nov 20 with quarterly rebalance below.

https://www.portfoliovisualizer.com/bac ... tion3_2=45
Same if you extend the results starting from 2010 - present
cellis212
Posts: 7
Joined: Tue Jan 19, 2021 7:01 pm

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

Post by cellis212 »

skierincolorado wrote: Thu Oct 07, 2021 12:22 pm
kbourgu wrote: Thu Oct 07, 2021 10:52 am Can anyone present any insights into the current state of TMF/TLT? Stocks seem to be recovering but looks like the bond portion is back in a downtrend.
The whole reason this works so well is that stocks and bonds are negatively correlated (would more accurately be described as uncorrelated). For the last few weeks they were positively correlated, so it's good to see the correlation reduced again. And as DMoogle said, this is a long-term strategy, short terms things like this should be completely ignored. I wouldn't even biggen to evaluate this strategy on any time horizon less than 10 years, preferably 20.
The more correct phrase would be that equities and treasuries have "negative tail dependence." When times are good they don't really move together, but when sh*t hits the fan, they go sharply in opposite directions. That's why the strategy works so much better with treasuries than something like corporate bonds or muni bonds. In normal times, they are uncorrelated with equities, but they can crash together.

That's why it's so useful to think of the non-equity component as crash insurance and then thinking about the options in terms of:

"deductible" -- how bad do things need to be for a negative correlation. High deductible means things have to get bad before the negative correlation starts. Low deductibles are better.

"coverage limit" -- how negatively correlated are they in a crash. High coverage limit means they are really negatively correlated in very bad times. HIgher coverage limit is better.

"premium" -- expected return on investment if there is no crash. Negative premium means positive expected return, zero premium means 0 expected return, positive premium means negative expected return. Lower (ideally negative) premiums are better.

"interest rate risk" -- if interest rates go up, how does that impact your insurance value (this is a common problem in life insurance)? Note that it also means that your premiums go down by more if interest rates go down (which is one reason TMF dominates in backtests). Low interest rate risk is better.

For instance:
- TMF: High deductible, high coverage limit, positive premium, highest interest rate risk.
- TYD: High deductible, medium coverage limit, slightly higher premium than TMF, medium-low interest rate risk.
- EDV: High deductible, medium coverage limit, negative premium, medium interest rate risk.
- cash: Low deductible, low coverage limit, zero premium, zero interest rate risk.
- long short-term vol: zero deductible, highest coverage limit, very high premium, zero interest rate risk.
- long medium-term vol: low deductible, high coverage limit, high premium, zero interest rate risk.
- SPY puts: zero deductible, extremely high coverage, very high premium, zero interest rate risk.
- gold: medium deductible, medium coverage limit, medium premium, negative interest rate risk.


The main questions then are:
- How comfortable am I with "non-crash" drawdowns (like 2018)?
- How worried am I about interest rates?
- How high of a premium am I willing to pay?
investor.was.here
Posts: 88
Joined: Thu Oct 08, 2020 2:52 am

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

Post by investor.was.here »

Has anyone considered implementing this using NTSX with margin instead?

The max drawdown on NTSX since 1993 according to PV is -40.81%. With M1Plus, you can borrow at 2% APY and it has only 25% maintenance margin.

It's a bit riskier than HFEA. Tweaked to 55/45 by mixing in TYD would have barely hit the margin req. Using TMF should avoid it, as shown below.
  • 90% NTSX (after 2x, using margin)
  • 10% TMF
I can't think of a way to extract the 6x ITT out of it to create the 4x ITT that we want. Maybe you all can.

Here's a spin with 10% emerging markets.
  • 80% NTSX (after 2x, using margin)
  • 10% NTSE (after 2x, using margin)
  • 10% TMF
Could also be used for 3x AWP, as shown below.
  • 50% NTSX (after 2x, using margin)
  • 35% TMF
  • 15% UGL
Why bother? NTSX holds unleveraged equities so no long-term tracking error. Maybe lower fees and liquidation risk.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

cellis212 wrote: Fri Oct 15, 2021 8:33 am
skierincolorado wrote: Thu Oct 07, 2021 12:22 pm
kbourgu wrote: Thu Oct 07, 2021 10:52 am Can anyone present any insights into the current state of TMF/TLT? Stocks seem to be recovering but looks like the bond portion is back in a downtrend.
The whole reason this works so well is that stocks and bonds are negatively correlated (would more accurately be described as uncorrelated). For the last few weeks they were positively correlated, so it's good to see the correlation reduced again. And as DMoogle said, this is a long-term strategy, short terms things like this should be completely ignored. I wouldn't even biggen to evaluate this strategy on any time horizon less than 10 years, preferably 20.
The more correct phrase would be that equities and treasuries have "negative tail dependence." When times are good they don't really move together, but when sh*t hits the fan, they go sharply in opposite directions. That's why the strategy works so much better with treasuries than something like corporate bonds or muni bonds. In normal times, they are uncorrelated with equities, but they can crash together.

That's why it's so useful to think of the non-equity component as crash insurance and then thinking about the options in terms of:

"deductible" -- how bad do things need to be for a negative correlation. High deductible means things have to get bad before the negative correlation starts. Low deductibles are better.

"coverage limit" -- how negatively correlated are they in a crash. High coverage limit means they are really negatively correlated in very bad times. HIgher coverage limit is better.

"premium" -- expected return on investment if there is no crash. Negative premium means positive expected return, zero premium means 0 expected return, positive premium means negative expected return. Lower (ideally negative) premiums are better.

"interest rate risk" -- if interest rates go up, how does that impact your insurance value (this is a common problem in life insurance)? Note that it also means that your premiums go down by more if interest rates go down (which is one reason TMF dominates in backtests). Low interest rate risk is better.

For instance:
- TMF: High deductible, high coverage limit, positive premium, highest interest rate risk.
- TYD: High deductible, medium coverage limit, slightly higher premium than TMF, medium-low interest rate risk.
- EDV: High deductible, medium coverage limit, negative premium, medium interest rate risk.
- cash: Low deductible, low coverage limit, zero premium, zero interest rate risk.
- long short-term vol: zero deductible, highest coverage limit, very high premium, zero interest rate risk.
- long medium-term vol: low deductible, high coverage limit, high premium, zero interest rate risk.
- SPY puts: zero deductible, extremely high coverage, very high premium, zero interest rate risk.
- gold: medium deductible, medium coverage limit, medium premium, negative interest rate risk.


The main questions then are:
- How comfortable am I with "non-crash" drawdowns (like 2018)?
- How worried am I about interest rates?
- How high of a premium am I willing to pay?
This is a decent analogy. But I think more of the return is actually coming from TMF as an independent source of return than many in this thread think. And even more would come from TYD. This is why substituting ITT for LTT in a backtest dramatically increases return AND reduces the max drawdown, when done in the correct ratio.

When you say TYD has a 'medium coverage limit' that's true if we buy it in the same quantity as TMF. If we buy it in larger quantities, we increase the coverage limit. And since it has medium-low interest rate risk, we have not increased our risk.

For somebody that already has 100% of their net worth in HFEA, they can't buy more TYD. But I am finding most people in this thread do not have their entire portfolio in HFEA - only a small to medium portion. Which is why I'm suggesting people allocate a larger portion of their portfolio to a 'modified HFEA' using TYD or ITT futures.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

cellis212 wrote: Fri Oct 15, 2021 8:33 am
skierincolorado wrote: Thu Oct 07, 2021 12:22 pm
kbourgu wrote: Thu Oct 07, 2021 10:52 am Can anyone present any insights into the current state of TMF/TLT? Stocks seem to be recovering but looks like the bond portion is back in a downtrend.
The whole reason this works so well is that stocks and bonds are negatively correlated (would more accurately be described as uncorrelated). For the last few weeks they were positively correlated, so it's good to see the correlation reduced again. And as DMoogle said, this is a long-term strategy, short terms things like this should be completely ignored. I wouldn't even biggen to evaluate this strategy on any time horizon less than 10 years, preferably 20.
The more correct phrase would be that equities and treasuries have "negative tail dependence." When times are good they don't really move together, but when sh*t hits the fan, they go sharply in opposite directions. That's why the strategy works so much better with treasuries than something like corporate bonds or muni bonds. In normal times, they are uncorrelated with equities, but they can crash together.

That's why it's so useful to think of the non-equity component as crash insurance and then thinking about the options in terms of:

"deductible" -- how bad do things need to be for a negative correlation. High deductible means things have to get bad before the negative correlation starts. Low deductibles are better.

"coverage limit" -- how negatively correlated are they in a crash. High coverage limit means they are really negatively correlated in very bad times. HIgher coverage limit is better.

"premium" -- expected return on investment if there is no crash. Negative premium means positive expected return, zero premium means 0 expected return, positive premium means negative expected return. Lower (ideally negative) premiums are better.

"interest rate risk" -- if interest rates go up, how does that impact your insurance value (this is a common problem in life insurance)? Note that it also means that your premiums go down by more if interest rates go down (which is one reason TMF dominates in backtests). Low interest rate risk is better.

For instance:
- TMF: High deductible, high coverage limit, positive premium, highest interest rate risk.
- TYD: High deductible, medium coverage limit, slightly higher premium than TMF, medium-low interest rate risk.
- EDV: High deductible, medium coverage limit, negative premium, medium interest rate risk.
- cash: Low deductible, low coverage limit, zero premium, zero interest rate risk.
- long short-term vol: zero deductible, highest coverage limit, very high premium, zero interest rate risk.
- long medium-term vol: low deductible, high coverage limit, high premium, zero interest rate risk.
- SPY puts: zero deductible, extremely high coverage, very high premium, zero interest rate risk.
- gold: medium deductible, medium coverage limit, medium premium, negative interest rate risk.


The main questions then are:
- How comfortable am I with "non-crash" drawdowns (like 2018)?
- How worried am I about interest rates?
- How high of a premium am I willing to pay?
This is a decent analogy. But I think more of the return is actually coming from TMF as an independent source of return than many in this thread think. And even more would come from TYD. This is why substituting ITT for LTT in a backtest dramatically increases return AND reduces the max drawdown, when done in the correct ratio.

When you say TYD has a 'medium coverage limit' that's true if we buy it in the same quantity as TMF. If we buy it in larger quantities, we increase the coverage limit. And since it has medium-low interest rate risk, we have not increased our risk.

For somebody that already has 100% of their net worth in HFEA, they can't buy more TYD. But I am finding most people in this thread do not have their entire portfolio in HFEA - only a small to medium portion. Which is why I'm suggesting people allocate a larger portion of their portfolio to a 'modified HFEA' using TYD or ITT futures.
TheDoctor91
Posts: 158
Joined: Thu Feb 25, 2021 11:43 am

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

Post by TheDoctor91 »

firebirdparts wrote: Wed Oct 13, 2021 9:34 am
TheDoctor91 wrote: Fri Oct 08, 2021 11:05 pm Someone make the TMF bleeding stop!
Your timing is impeccable.
Thanks to whomever made it happen!
User avatar
cflannagan
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Location: Working Remotely

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

Post by cflannagan »

cellis212 wrote: Fri Oct 15, 2021 8:33 am The more correct phrase would be that equities and treasuries have "negative tail dependence." When times are good they don't really move together, but when sh*t hits the fan, they go sharply in opposite directions. That's why the strategy works so much better with treasuries than something like corporate bonds or muni bonds. In normal times, they are uncorrelated with equities, but they can crash together.

That's why it's so useful to think of the non-equity component as crash insurance and then thinking about the options in terms of:

"deductible" -- how bad do things need to be for a negative correlation. High deductible means things have to get bad before the negative correlation starts. Low deductibles are better.

"coverage limit" -- how negatively correlated are they in a crash. High coverage limit means they are really negatively correlated in very bad times. HIgher coverage limit is better.

"premium" -- expected return on investment if there is no crash. Negative premium means positive expected return, zero premium means 0 expected return, positive premium means negative expected return. Lower (ideally negative) premiums are better.

"interest rate risk" -- if interest rates go up, how does that impact your insurance value (this is a common problem in life insurance)? Note that it also means that your premiums go down by more if interest rates go down (which is one reason TMF dominates in backtests). Low interest rate risk is better.

For instance:
- TMF: High deductible, high coverage limit, positive premium, highest interest rate risk.
- TYD: High deductible, medium coverage limit, slightly higher premium than TMF, medium-low interest rate risk.
- EDV: High deductible, medium coverage limit, negative premium, medium interest rate risk.
- cash: Low deductible, low coverage limit, zero premium, zero interest rate risk.
- long short-term vol: zero deductible, highest coverage limit, very high premium, zero interest rate risk.
- long medium-term vol: low deductible, high coverage limit, high premium, zero interest rate risk.
- SPY puts: zero deductible, extremely high coverage, very high premium, zero interest rate risk.
- gold: medium deductible, medium coverage limit, medium premium, negative interest rate risk.
Maybe I'm missing some context that would assign TMF, TYD, etc those "premium" ratings - but by your definitions, positive premiums = negative expected returns, while negative premiums = positive expected returns. How is it TMF, TYD, etc earned a positive premium rating (implying negative expected returns)?

Image

Seems to be positive returns over longer periods of time, so that's why I mentioned I might be missing some context that earned TMF, TYD, etc the "positive premium" label. What am I missing here?
cellis212
Posts: 7
Joined: Tue Jan 19, 2021 7:01 pm

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

Post by cellis212 »

cflannagan wrote: Fri Oct 15, 2021 6:36 pm
cellis212 wrote: Fri Oct 15, 2021 8:33 am The more correct phrase would be that equities and treasuries have "negative tail dependence." When times are good they don't really move together, but when sh*t hits the fan, they go sharply in opposite directions. That's why the strategy works so much better with treasuries than something like corporate bonds or muni bonds. In normal times, they are uncorrelated with equities, but they can crash together.

That's why it's so useful to think of the non-equity component as crash insurance and then thinking about the options in terms of:

"deductible" -- how bad do things need to be for a negative correlation. High deductible means things have to get bad before the negative correlation starts. Low deductibles are better.

"coverage limit" -- how negatively correlated are they in a crash. High coverage limit means they are really negatively correlated in very bad times. HIgher coverage limit is better.

"premium" -- expected return on investment if there is no crash. Negative premium means positive expected return, zero premium means 0 expected return, positive premium means negative expected return. Lower (ideally negative) premiums are better.

"interest rate risk" -- if interest rates go up, how does that impact your insurance value (this is a common problem in life insurance)? Note that it also means that your premiums go down by more if interest rates go down (which is one reason TMF dominates in backtests). Low interest rate risk is better.

For instance:
- TMF: High deductible, high coverage limit, positive premium, highest interest rate risk.
- TYD: High deductible, medium coverage limit, slightly higher premium than TMF, medium-low interest rate risk.
- EDV: High deductible, medium coverage limit, negative premium, medium interest rate risk.
- cash: Low deductible, low coverage limit, zero premium, zero interest rate risk.
- long short-term vol: zero deductible, highest coverage limit, very high premium, zero interest rate risk.
- long medium-term vol: low deductible, high coverage limit, high premium, zero interest rate risk.
- SPY puts: zero deductible, extremely high coverage, very high premium, zero interest rate risk.
- gold: medium deductible, medium coverage limit, medium premium, negative interest rate risk.
Maybe I'm missing some context that would assign TMF, TYD, etc those "premium" ratings - but by your definitions, positive premiums = negative expected returns, while negative premiums = positive expected returns. How is it TMF, TYD, etc earned a positive premium rating (implying negative expected returns)?

Image

Seems to be positive returns over longer periods of time, so that's why I mentioned I might be missing some context that earned TMF, TYD, etc the "positive premium" label. What am I missing here?

Interest rates were mostly flat/decreasing for that period. If you hold interest rates constant, then TYD and TMF will lose money because the cost of leverage (plus fees, daily rebalancing, etc.) is higher than the interest the bonds pay out.
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