HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by cos »

tradri wrote: Mon Apr 19, 2021 3:39 pm I'm not sure if this has been discussed before, but is there an optimal rebalancing day?

I have seen some conflicting articles online. Some say end of month is ideal, others say the first of the month is ideal...

Should one even worry about that, or simply rebalance on the 1st of every quarter for convenience?
Search the thread. Hydromod in particular has done extensive work on this. The consensus seems to be that the 1st of every quarter approaches the local optimum for highest CAGR and simplest implementation.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

cos wrote: Mon Apr 19, 2021 4:13 pm
Search the thread. Hydromod in particular has done extensive work on this. The consensus seems to be that the 1st of every quarter approaches the local optimum for highest CAGR and simplest implementation.
Great. Thank you.
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

tradri wrote: Mon Apr 19, 2021 4:18 pm
cos wrote: Mon Apr 19, 2021 4:13 pm
Search the thread. Hydromod in particular has done extensive work on this. The consensus seems to be that the 1st of every quarter approaches the local optimum for highest CAGR and simplest implementation.
Great. Thank you.
I wouldn't worry too much about any particular day, just near the turn of the month (a few days before to a few after) has historically done a bit better. May be coincidence, but shouldn't hurt.
SCraw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by SCraw »

Throwing another $50k in today. Moving to a zero cap gains tax country had made this a lot more attractive (though I can't be bothered to bootstrap it). Here's to hoping that absurd US large cap growth continues.
Ramjet
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

SCraw wrote: Wed Apr 21, 2021 3:16 am Throwing another $50k in today. Moving to a zero cap gains tax country had made this a lot more attractive (though I can't be bothered to bootstrap it). Here's to hoping that absurd US large cap growth continues.
How much total are you invested?

What percentage of your overall portfolio does it make up?
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Y'all might have been fully aware of this but I wasn't: here's how hedgies get a cut of LETFs performance and what contributes to tracking error. Notice this has been going on forever, 2012 is when it was published.
http://epchan.blogspot.com/2012/10/a-le ... ategy.html
Better lucky than smart.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

Been following along for the last few months. Bought in a alternative version of HFEA (45% TQQQ, 55% UBT) during the LTT downward spiral, so far I'm up overall and beating my "conservative" portfolio with surprisingly a smaller drawdown. I've also been concerned about the implications of rising interest rates and have read through most if not all the pages here about alternative hedges. Surprisingly, I only found a few mentions of using the US dollar in the way of some of the 2x short ETFs (EUO, YCS, CROC).

CROC seemed to fare the best in its limited history, but is also new and extremely thinly traded and probably suffers from Covid bias where AU fared far better than the rest of the world. A longer backtest didn't seem to produce compelling results though, so won't be exploring that particular option further.

What did seem interesting though was a small 2x USD mutual fund, Rydex Strengthening Dollar 2x Strategy Fund Class H (RYSBX). The H class is the no-load class but all 3 have a fairly high maintenance fee of ~2%. It's also quite small, with only 3MM AUM, but what caught my eye is that it's been around since 2005 and I'm not sure if its ever been brought up here.

Thesis: The USD itself is is a safe haven for when a large global crash occurs. Additionally, the USD appreciates more as treasury rates increase, so its both a hedge against both UPRO/TQQQ as well as TMF/UBT dips.

It's almost counterintuitive since USD and LTT should be strongly related, but there is surprisingly near 0 correlation between the two long term.

The Sept 2008 crash is an interesting example here.

Image

USD/RYSBX immediately responds to the crash, but it takes a while for LTT to catch up. When it does, its then inverses RYSBX. Strangely, or maybe less strangely due to the US response, the Mar 2020 crash was led by a LTT spike and then followed by the USD. In both cases though, one hedged equities first and the other kicked in while the first one drew down.

For my rebalance this month, I'm considering a larger shift from TQQQ/UBT 45/55 to TQQQ/UBT/RYSBX 55/35/10. I went with a higher LTT with the 2x leverage originally, but with another uncorrelated hedge, I'm comfortable increasing TQQQ back up to 55%. Here's the backtest from 2005 when RYSBX was introduced:

Image

https://www.portfoliovisualizer.com/bac ... n10_3=-145
Portfolio 1: HFEA UPRO/TMF 55/45 synthetic to match 2005
Portfolio 2: My current TQQQ/UBT 45/55 synthetic to match 2005
Portfolio 3: Proposed TQQQ/UBT/RYSBX 55/35/10

Counter points:
  • RYSBX is too small (Yes I agree, but so is UBT and I'm already in that so...)
  • That draw down in 2008 was massive (That appears to be more of a function of a larger weight on TQQQ rather than the USD a 55/45 TQQQ/UBT is similarly affected w/o the TMF 3x hedge. Also, something appears to have fundamentally shifted in 2013 for the USD causing this portfolio to outperform HEFA consistently. Since 2008, all but one major drawdowns and both down years were substantially smaller)
  • This doesn't protect against (and may even increase) exposure to inflation
  • USD is losing its reserve currency status
  • USD is in a decade long decline (Yes, but insurance is supposed to cost some money even though LTTs have paid for itself and then some)
I'm under no illusion that this is not a speculative hedge against rising interest rates. Would love additional thoughts to build a weaker or stronger case.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

adamhg wrote: Thu Apr 22, 2021 1:24 pm Been following along for the last few months. Bought in a alternative version of HFEA (45% TQQQ, 55% UBT) during the LTT downward spiral, so far I'm up overall and beating my "conservative" portfolio with surprisingly a smaller drawdown. I've also been concerned about the implications of rising interest rates and have read through most if not all the pages here about alternative hedges. Surprisingly, I only found a few mentions of using the US dollar in the way of some of the 2x short ETFs (EUO, YCS, CROC).

CROC seemed to fare the best in its limited history, but is also new and extremely thinly traded and probably suffers from Covid bias where AU fared far better than the rest of the world. A longer backtest didn't seem to produce compelling results though, so won't be exploring that particular option further.

What did seem interesting though was a small 2x USD mutual fund, Rydex Strengthening Dollar 2x Strategy Fund Class H (RYSBX). The H class is the no-load class but all 3 have a fairly high maintenance fee of ~2%. It's also quite small, with only 3MM AUM, but what caught my eye is that it's been around since 2005 and I'm not sure if its ever been brought up here.

Thesis: The USD itself is is a safe haven for when a large global crash occurs. Additionally, the USD appreciates more as treasury rates increase, so its both a hedge against both UPRO/TQQQ as well as TMF/UBT dips.

It's almost counterintuitive since USD and LTT should be strongly related, but there is surprisingly near 0 correlation between the two long term.

The Sept 2008 crash is an interesting example here.

Image

USD/RYSBX immediately responds to the crash, but it takes a while for LTT to catch up. When it does, its then inverses RYSBX. Strangely, or maybe less strangely due to the US response, the Mar 2020 crash was led by a LTT spike and then followed by the USD. In both cases though, one hedged equities first and the other kicked in while the first one drew down.

For my rebalance this month, I'm considering a larger shift from TQQQ/UBT 45/55 to TQQQ/UBT/RYSBX 55/35/10. I went with a higher LTT with the 2x leverage originally, but with another uncorrelated hedge, I'm comfortable increasing TQQQ back up to 55%. Here's the backtest from 2005 when RYSBX was introduced:

Image

https://www.portfoliovisualizer.com/bac ... n10_3=-145
Portfolio 1: HFEA UPRO/TMF 55/45 synthetic to match 2005
Portfolio 2: My current TQQQ/UBT 45/55 synthetic to match 2005
Portfolio 3: Proposed TQQQ/UBT/RYSBX 55/35/10

Counter points:
  • RYSBX is too small (Yes I agree, but so is UBT and I'm already in that so...)
  • That draw down in 2008 was massive (That appears to be more of a function of a larger weight on TQQQ rather than the USD a 55/45 TQQQ/UBT is similarly affected w/o the TMF 3x hedge. Also, something appears to have fundamentally shifted in 2013 for the USD causing this portfolio to outperform HEFA consistently. Since 2008, all but one major drawdowns and both down years were substantially smaller)
  • This doesn't protect against (and may even increase) exposure to inflation
  • USD is losing its reserve currency status
  • USD is in a decade long decline (Yes, but insurance is supposed to cost some money even though LTTs have paid for itself and then some)
I'm under no illusion that this is not a speculative hedge against rising interest rates. Would love additional thoughts to build a weaker or stronger case.
UBT is too illiquid for me and I would prefer not to represent whole percentages of AUM.
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

adamhg wrote: Thu Apr 22, 2021 1:24 pm Thesis: The USD itself is is a safe haven for when a large global crash occurs. Additionally, the USD appreciates more as treasury rates increase, so its both a hedge against both UPRO/TQQQ as well as TMF/UBT dips.

It's almost counterintuitive since USD and LTT should be strongly related, but there is surprisingly near 0 correlation between the two long term.

The Sept 2008 crash is an interesting example here.

USD/RYSBX immediately responds to the crash, but it takes a while for LTT to catch up. When it does, its then inverses RYSBX. Strangely, or maybe less strangely due to the US response, the Mar 2020 crash was led by a LTT spike and then followed by the USD. In both cases though, one hedged equities first and the other kicked in while the first one drew down.
From what I see even in your backtests, the USD fund seems to plow down pretty hard during 2008. Maybe I am misunderstanding what we are trying to protect against or diversify into???
adamhg wrote: Thu Apr 22, 2021 1:24 pm For my rebalance this month, I'm considering a larger shift from TQQQ/UBT 45/55 to TQQQ/UBT/RYSBX 55/35/10. I went with a higher LTT with the 2x leverage originally, but with another uncorrelated hedge, I'm comfortable increasing TQQQ back up to 55%. Here's the backtest from 2005 when RYSBX was introduced:
https://www.portfoliovisualizer.com/bac ... n10_3=-145
Portfolio 1: HFEA UPRO/TMF 55/45 synthetic to match 2005
Portfolio 2: My current TQQQ/UBT 45/55 synthetic to match 2005
Portfolio 3: Proposed TQQQ/UBT/RYSBX 55/35/10

Counter points:
  • RYSBX is too small (Yes I agree, but so is UBT and I'm already in that so...)
  • That draw down in 2008 was massive (That appears to be more of a function of a larger weight on TQQQ rather than the USD a 55/45 TQQQ/UBT is similarly affected w/o the TMF 3x hedge. Also, something appears to have fundamentally shifted in 2013 for the USD causing this portfolio to outperform HEFA consistently. Since 2008, all but one major drawdowns and both down years were substantially smaller)
  • This doesn't protect against (and may even increase) exposure to inflation
  • USD is losing its reserve currency status
  • USD is in a decade long decline (Yes, but insurance is supposed to cost some money even though LTTs have paid for itself and then some)
I'm under no illusion that this is not a speculative hedge against rising interest rates. Would love additional thoughts to build a weaker or stronger case.
Even if fund liquidity is worse, if you only need a small allocation (5-10%), it's feasible to use RYSBX. I am thinking about it for Intermediate-Term Treasuries funds, especially when I will leverage down to 2x.

On my end, I would be a bit concerned with USD because of the points you mention: inflation, relative strength being tested.

I'm thinking of some practical, diversified and middle-of-the-road type AA for myself, especially when I will "settle down" into my end-game allocation. So far, the idea is SP500, NASDAQ100, LTT, ITT, VIX (Midterm)... all of this in varying ratios and taking into account liquidity of whatever funds I would employ, based on where I am on the de-risking roadmap.

Btw, you don't need to stick with UBT if you want 2x LTT. You can do 50/ 50 on TLT and TMF. It will require rebalancing to keep the leverage close to target, but if you are following quarterly or month rebalancing, I doubt that will be a major problem. If you are really worried about going into 2x+ territory, you can always overweight TLT ever so slightly.

And... welcome to the BH forum! :sharebeer
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

adamhg wrote: Thu Apr 22, 2021 1:24 pm Surprisingly, I only found a few mentions of using the US dollar in the way of some of the 2x short ETFs (EUO, YCS, CROC).

What did seem interesting though was a small 2x USD mutual fund, Rydex Strengthening Dollar 2x Strategy Fund Class H (RYSBX). The H class is the no-load class but all 3 have a fairly high maintenance fee of ~2%. It's also quite small, with only 3MM AUM, but what caught my eye is that it's been around since 2005 and I'm not sure if its ever been brought up here.

Thesis: The USD itself is is a safe haven for when a large global crash occurs. Additionally, the USD appreciates more as treasury rates increase, so its both a hedge against both UPRO/TQQQ as well as TMF/UBT dips.
That's an interesting approach. Three issues:
-We're holding funds for ever around here. At 2.03% fees excluding borrowing costs, $10,000 invested in the fund lose $2,397 to the fees (Prospectus p.333)
- The fund gives you exposure to the change in the FX value of the dollar so by definition, absent constant trend, this mean reverts and is a drag as evidenced by the long term performance of the Fund.
-Finally, $3Mn under management...
Matter of fact, the real deal would be to short his inverse brother, 2 times weakening dollar fund, RYWBX. That one is an unmitigated disaster with 8 negative return years, one even and one positive over the last 10 years (p350 prospectus) and -6% yearly return over the same period. This one pays you to be insured. But it has all of $1.1Mn under management, so good luck finding shares to short I imagine.
Better lucky than smart.
SCraw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by SCraw »

Ramjet wrote: Wed Apr 21, 2021 7:40 am
SCraw wrote: Wed Apr 21, 2021 3:16 am Throwing another $50k in today. Moving to a zero cap gains tax country had made this a lot more attractive (though I can't be bothered to bootstrap it). Here's to hoping that absurd US large cap growth continues.
How much total are you invested?

What percentage of your overall portfolio does it make up?
$340k right now, probably another $200k over the next couple months. (unfortunately I've had to be out of the market since September). Aiming to glidepath into 100% VT @ 55.
Last edited by SCraw on Mon May 09, 2022 7:11 am, edited 1 time in total.
jdinatale
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jdinatale »

I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
Ramjet
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

jdinatale wrote: Fri Apr 23, 2021 12:58 pm I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
OP counts it as a "side bet" and not not part of his regular portfolio. I'm doing the same
jdinatale
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jdinatale »

Ramjet wrote: Fri Apr 23, 2021 1:10 pm
jdinatale wrote: Fri Apr 23, 2021 12:58 pm I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
OP counts it as a "side bet" and not not part of his regular portfolio. I'm doing the same
Just curious, what % of your total portfolio is this "side bet"? Mine is $10,000 out of $200,000, so 5%.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

IMO no reason to ignore diversification just because something is a "side bet."

I consider HFEA 100% US, so I overweigh the non-US portion of the non-HFEA portion of my portfolio.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jdinatale wrote: Fri Apr 23, 2021 12:58 pm I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
Perhaps the most important component of this strategy is the negative correlation between the 2 assets.

US equities/US Treasuries have a stronger negative correlation than Global equities/US Treasuries.

Therefore, I think there is a good argument for neglecting international exposure in this particular case.

P.S. Regarding the rest of your portfolio, I would recommend allocating countries based on market cap.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

tradri wrote: Fri Apr 23, 2021 1:41 pm
jdinatale wrote: Fri Apr 23, 2021 12:58 pm I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
Perhaps the most important component of this strategy is the negative correlation between the 2 assets.

US equities/US Treasuries have a stronger negative correlation than Global equities/US Treasuries.

Therefore, I think there is a good argument for neglecting international exposure in this particular case.

P.S. Regarding the rest of your portfolio, I would recommend allocating countries based on market cap.
How are you measuring this? When I plug in VOO VXUS TLT into Portfolio Visualizer I get -0.40 for VXUS and -0.40 for VOO, so effectively no difference.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Semantics wrote: Fri Apr 23, 2021 2:03 pm
How are you measuring this? When I plug in VOO VXUS TLT into Portfolio Visualizer I get -0.40 for VXUS and -0.40 for VOO, so effectively no difference.
When I plug in these ETFs, I get -0.40 for VXUS and -0.41 for VOO. I agree that it's a small difference.

However, the data only goes back to 2011.

When you look at the data since 2008, the MSCI EAFE has a correlation of -0.26, while the S&P 500 has a correlation of -0.32. https://www.portfoliovisualizer.com/ass ... rrelations

It seems like the negative correlation was more visible during the Great Recession.
perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

tradri wrote: Fri Apr 23, 2021 2:15 pm
Semantics wrote: Fri Apr 23, 2021 2:03 pm
How are you measuring this? When I plug in VOO VXUS TLT into Portfolio Visualizer I get -0.40 for VXUS and -0.40 for VOO, so effectively no difference.
When I plug in these ETFs, I get -0.40 for VXUS and -0.41 for VOO. I agree that it's a small difference.

However, the data only goes back to 2011.

When you look at the data since 2008, the MSCI EAFE has a correlation of -0.26, while the S&P 500 has a correlation of -0.32. https://www.portfoliovisualizer.com/ass ... rrelations

It seems like the negative correlation was more visible during the Great Recession.
Link back to 1987
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

perfectuncertainty wrote: Fri Apr 23, 2021 2:44 pm
Link back to 1987
Yes, it seems like the US equities/US treasuries correlation was higher before 2000. Is there an explanation for that?

Image

P.S. This article suggests that the correlations are higher during periods of high inflation expectations. https://www.tandfonline.com/doi/abs/10. ... ode=rafe20
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

tradri wrote: Fri Apr 23, 2021 2:49 pm
perfectuncertainty wrote: Fri Apr 23, 2021 2:44 pm
Link back to 1987
Yes, it seems like the US equities/US treasuries correlation was higher before 2000. Is there an explanation for that?
[...]
P.S. This article suggests that the correlations are higher during periods of high inflation expectations. https://www.tandfonline.com/doi/abs/10. ... ode=rafe20
The study you posted is unfortunately paywalled.

Here's a link to a nice article by Union Bank of Switzerland (UBS) about the same subject: https://www.ubs.com/global/en/asset-man ... ation.html
Someone previously posted this article on BH... I think it might have even been in this thread. :confused
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

tradri wrote: Fri Apr 23, 2021 2:49 pm
perfectuncertainty wrote: Fri Apr 23, 2021 2:44 pm
Link back to 1987
Yes, it seems like the US equities/US treasuries correlation was higher before 2000. Is there an explanation for that?

Image

P.S. This article suggests that the correlations are higher during periods of high inflation expectations. https://www.tandfonline.com/doi/abs/10. ... ode=rafe20
Changes in interest rates ought to result in correlation, whether interest rates are going up or down.
This time is the same
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

OohLaLa wrote: Fri Apr 23, 2021 7:47 pm The study you posted is unfortunately paywalled.

Here's a link to a nice article by Union Bank of Switzerland (UBS) about the same subject: https://www.ubs.com/global/en/asset-man ... ation.html
Someone previously posted this article on BH... I think it might have even been in this thread. :confused
Thanks for linking that article.

It seems that it all circles back to the original premise, that this strategy works better in a low inflation/interest rate environment.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Well, this strategy, and all strategies everywhere, work best during falling interest rates. Returns are correlated (both going up) If the interest rates are falling, then you want the longest bonds you can get (going up more).
This time is the same
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

tradri wrote: Fri Apr 23, 2021 2:49 pm
perfectuncertainty wrote: Fri Apr 23, 2021 2:44 pm
Link back to 1987
Yes, it seems like the US equities/US treasuries correlation was higher before 2000. Is there an explanation for that?
My very unscientific take has always been that LTT yields were much higher prior to 2000 (>5%), so that bonds would have been a more full-fledged alternative to stocks rather than just a safe haven. Thus, the negative correlation due to changes in market risk tolerance would be washed out by other factors. This seems to be consistent with the equity risk premium over time - the periods where it's lowest seem to coincide with the periods where stocks and bonds are positively correlated.

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

Post by tradri »

Semantics wrote: Sat Apr 24, 2021 1:31 pm
My very unscientific take has always been that LTT yields were much higher prior to 2000 (>5%), so that bonds would have been a more full-fledged alternative to stocks rather than just a safe haven. Thus, the negative correlation due to changes in market risk tolerance would be washed out by other factors. This seems to be consistent with the equity risk premium over time - the periods where it's lowest seem to coincide with the periods where stocks and bonds are positively correlated.

Image
Interesting. This would suggest that a low yield is beneficial for something to be considered a "safe haven" asset, right?

Does this mean that intermediate term treasuries have a better chance of remaining an uncorrelated "safe haven" asset if interest rates return to normal levels?
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

tradri wrote: Sat Apr 24, 2021 2:42 pm
Semantics wrote: Sat Apr 24, 2021 1:31 pm
My very unscientific take has always been that LTT yields were much higher prior to 2000 (>5%), so that bonds would have been a more full-fledged alternative to stocks rather than just a safe haven. Thus, the negative correlation due to changes in market risk tolerance would be washed out by other factors. This seems to be consistent with the equity risk premium over time - the periods where it's lowest seem to coincide with the periods where stocks and bonds are positively correlated.
Interesting. This would suggest that a low yield is beneficial for something to be considered a "safe haven" asset, right?

Does this mean that intermediate term treasuries have a better chance of remaining an uncorrelated "safe haven" asset if interest rates return to normal levels?
I am more and more convinced that HFEA would benefit from inclusion of ITT in small measure. This is especially true in my version of it, due to my long-term roadmap.

ITT provide:
-dampening of the effect of inflation and rising rates, as they are less sensitive to them.
-still a good, middle-ground yield.
-still a good, negative correlation to SP500.

Setbacks of ITT as part of HFEA:
-slightly less protection against drawdowns.
-no key-in-hand LETF that has large traction/ popularity. This means there is somewhat of a practical limit to how much you can allocate.
***In my case, this isn't a huge issue, as right now I do not have massive funds allocated to HFEA and I can easily assign 10% to TYD. As I de-risk + de-lever, as well as hopefully increase the value of my HFEA investment, I can easily go 50/50 on TYD and UST, putting leverage of ITT at 2.5. Theoretically, the higher the value (and closer to my goal), then the lower the leverage and thus the possibility of then blending something like IEF + UST + TYD, never becoming "overweight" in either of the leveraged forms.

Personally, with SP500, N100, LTT, ITT and VIX Midterm, I would feel good about diversifying away a lot of the risks we've seen discussed here. There is of course things like the infamous stagflation, but that just seems like all-round bad news for anyone involved in the stock market. If you're 3x at that point then it's definitely a massive risk.

If anybody has more experience with ITT or has interesting material about the more "human" (behavioral) aspects surrounding them, that would be much appreciated!

Here are some quick views, at a glance:
https://www.portfoliovisualizer.com/ass ... &months=36

https://www.portfoliovisualizer.com/bac ... tion4_3=50
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

OohLaLa wrote: Sat Apr 24, 2021 4:31 pm I am more and more convinced that HFEA would benefit from inclusion of ITT in small measure. This is especially true in my version of it, due to my long-term roadmap.

ITT provide:
-dampening of the effect of inflation and rising rates, as they are less sensitive to them.
-still a good, middle-ground yield.
-still a good, negative correlation to SP500.

Setbacks of ITT as part of HFEA:
-slightly less protection against drawdowns.
-no key-in-hand LETF that has large traction/ popularity. This means there is somewhat of a practical limit to how much you can allocate.
***In my case, this isn't a huge issue, as right now I do not have massive funds allocated to HFEA and I can easily assign 10% to TYD. As I de-risk + de-lever, as well as hopefully increase the value of my HFEA investment, I can easily go 50/50 on TYD and UST, putting leverage of ITT at 2.5. Theoretically, the higher the value (and closer to my goal), then the lower the leverage and thus the possibility of then blending something like IEF + UST + TYD, never becoming "overweight" in either of the leveraged forms.

Personally, with SP500, N100, LTT, ITT and VIX Midterm, I would feel good about diversifying away a lot of the risks we've seen discussed here. There is of course things like the infamous stagflation, but that just seems like all-round bad news for anyone involved in the stock market. If you're 3x at that point then it's definitely a massive risk.
For the leveraged strategy I'm pursuing (70/30 3x stocks/treasuries) the difference between choosing intermediate term treasuries vs long term treasuries has been negligible over the long term. (according to the Simba backtesting spreadsheet)

For practical reasons I am going with intermediate term treasuries (WisdomTree Europe doesn't offer 3x LTT), but I don't see any advantage of picking one over the other.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zdzdbets »

If there was a 5x US long term treasury ETF would you use that instead of TMF?
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

zdzdbets wrote: Sun Apr 25, 2021 6:32 am If there was a 5x US long term treasury ETF would you use that instead of TMF?
I think a more balanced (maybe 50/50) 4x stocks/treasuries portfolio might be interesting. But it's only a pipe dream.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

jdinatale wrote: Fri Apr 23, 2021 1:25 pm
Ramjet wrote: Fri Apr 23, 2021 1:10 pm
jdinatale wrote: Fri Apr 23, 2021 12:58 pm I have a 100% stock portfolio, 60/40 US to International split. For balancing purposes, should I count the entire 55/45 UPRO/TMF bucket as US stock? It's $10,000, so would I just say that I have $10,000 in US equity?
OP counts it as a "side bet" and not not part of his regular portfolio. I'm doing the same
Just curious, what % of your total portfolio is this "side bet"? Mine is $10,000 out of $200,000, so 5%.
Initial one-time contribution started at 12.5% a few years ago
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OohLaLa
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

tradri wrote: Sun Apr 25, 2021 6:53 am
zdzdbets wrote: Sun Apr 25, 2021 6:32 am If there was a 5x US long term treasury ETF would you use that instead of TMF?
I think a more balanced (maybe 50/50) 4x stocks/treasuries portfolio might be interesting. But it's only a pipe dream.
I don't know anybody on here that would suggest holding 5x anything (maybe short-term bonds lol), long-term. A blend of 5x SP500 + LTT would get knee-capped so many times that there is really no long-term benefit to it. I didn't check but I am wondering if it would have even survived 2020-2021.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

OohLaLa wrote: Sun Apr 25, 2021 2:04 pm I don't know anybody on here that would suggest holding 5x anything (maybe short-term bonds lol), long-term. A blend of 5x SP500 + LTT would get knee-capped so many times that there is really no long-term benefit to it. I didn't check but I am wondering if it would have even survived 2020-2021.
I think the only time it would have failed (in terms of total loss) is when the market dropped by 20.47% in 1987. https://en.wikipedia.org/wiki/List_of_l ... _500_Index
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

zdzdbets wrote: Sun Apr 25, 2021 6:32 am If there was a 5x US long term treasury ETF would you use that instead of TMF?
Quite possibly. Better yet would be an unleveraged 50-year or 100-year US treasury ETF, and my ultimate fantasy would be a zero-coupon STRIPS version of that.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

cos wrote: Sun Apr 25, 2021 4:21 pm
Quite possibly. Better yet would be an unleveraged 50-year or 100-year US treasury ETF, and my ultimate fantasy would be a zero-coupon STRIPS version of that.
If you want to give the Austrian government your money for the next 100 years, you can already do so. :wink:

https://moneyweek.com/investments/bonds ... r-bond?amp
TheCleverest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheCleverest »

Apologies if someone already has shared their thoughts on this matter...

What strikes me is that if someone is looking at this as a lottery ticket and truly isolated from the rest of one’s portfolio why even bother with adding bonds at all?

I get that a 2x or 3x equity fund would have higher volatility and drawdowns. However, please correct me if I’m wrong, wouldn't it also have a higher *expected* payout? I mean, if we really want to let it rip why not go full pedal to the metal?

Meaning if one could stomach a 100% 2x or 3x LETF wouldn’t this be theoretically superior in terms of return vs adding in a bond portion?

For people who have this HFEA as only a tiny sliver of their portfolio why wouldn’t you view the majority of the rest of your portfolio as the part that goes up when this strategy goes down? I get the sense that if the HF strategy works out people would be happy. However, if it doesn’t work out then the rest of their portfolio will carry them through retirement.

I am of the mind that the 5% (or whatever small percentage you want to use) play money idea by Bogle and others is meant to be a) extremely concentrated and b) may have very high returns and c) may not work out nor makes fundamental investing sense.

To me the 100% 2x or 3x strategy and the HF strategy both depend on a) equity premium being greater than bonds and b) equities going up.

In full disclosure, I am sympathetic to a 100% 2x ETF. However, I’m open and hoping to hear some thoughts on why they employ the HFEA vs a 100% 2x ETF for a sliver of their portfolio? TIA
No use in being clever - have to be the cleverest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

TheCleverest wrote: Sun Apr 25, 2021 9:15 pm Apologies if someone already has shared their thoughts on this matter...

What strikes me is that if someone is looking at this as a lottery ticket and truly isolated from the rest of one’s portfolio why even bother with adding bonds at all?

I get that a 2x or 3x equity fund would have higher volatility and drawdowns. However, please correct me if I’m wrong, wouldn't it also have a higher *expected* payout? I mean, if we really want to let it rip why not go full pedal to the metal?

Meaning if one could stomach a 100% 2x or 3x LETF wouldn’t this be theoretically superior in terms of return vs adding in a bond portion?

For people who have this HFEA as only a tiny sliver of their portfolio why wouldn’t you view the majority of the rest of your portfolio as the part that goes up when this strategy goes down? I get the sense that if the HF strategy works out people would be happy. However, if it doesn’t work out then the rest of their portfolio will carry them through retirement.

I am of the mind that the 5% (or whatever small percentage you want to use) play money idea by Bogle and others is meant to be a) extremely concentrated and b) may have very high returns and c) may not work out nor makes fundamental investing sense.

To me the 100% 2x or 3x strategy and the HF strategy both depend on a) equity premium being greater than bonds and b) equities going up.

In full disclosure, I am sympathetic to a 100% 2x ETF. However, I’m open and hoping to hear some thoughts on why they employ the HFEA vs a 100% 2x ETF for a sliver of their portfolio? TIA
No, because long term leveraged ETFs, on their own, haven’t really outperformed the index by astronomical amounts over the very long term. You need two highly volatile non-correlated assets in order to rebalance when one asset class crashes.

SSO, the oldest leveraged SP500 ETF I know of goes back to 2006. All of it’s current outperformance essentially comes from the run up over the last 12 months.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Compare UOPIX to QQQ. It’s a bit misleading because UOPIX was initiated in 1998, missing most of the dot com run up, but it still has only 1/3 of the returns over that period.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

TheCleverest wrote: Sun Apr 25, 2021 9:15 pm Apologies if someone already has shared their thoughts on this matter...

What strikes me is that if someone is looking at this as a lottery ticket and truly isolated from the rest of one’s portfolio why even bother with adding bonds at all?

I get that a 2x or 3x equity fund would have higher volatility and drawdowns. However, please correct me if I’m wrong, wouldn't it also have a higher *expected* payout? I mean, if we really want to let it rip why not go full pedal to the metal?

Meaning if one could stomach a 100% 2x or 3x LETF wouldn’t this be theoretically superior in terms of return vs adding in a bond portion?

For people who have this HFEA as only a tiny sliver of their portfolio why wouldn’t you view the majority of the rest of your portfolio as the part that goes up when this strategy goes down? I get the sense that if the HF strategy works out people would be happy. However, if it doesn’t work out then the rest of their portfolio will carry them through retirement.

I am of the mind that the 5% (or whatever small percentage you want to use) play money idea by Bogle and others is meant to be a) extremely concentrated and b) may have very high returns and c) may not work out nor makes fundamental investing sense.

To me the 100% 2x or 3x strategy and the HF strategy both depend on a) equity premium being greater than bonds and b) equities going up.

In full disclosure, I am sympathetic to a 100% 2x ETF. However, I’m open and hoping to hear some thoughts on why they employ the HFEA vs a 100% 2x ETF for a sliver of their portfolio? TIA
It looks like the more leverage is being used, the more efficient (in terms of Sharpe ratio) the portfolio has to become in order to maximize returns.

For a 3x leveraged ETF strategy, 70/30 3x stocks/treasuries seems to have produced the highest returns.(viewtopic.php?p=5822849#p5822849)
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Jags4186 wrote: Sun Apr 25, 2021 9:22 pm
No, because long term leveraged ETFs, on their own, haven’t really outperformed the index by astronomical amounts over the very long term. You need two highly volatile non-correlated assets in order to rebalance when one asset class crashes.

SSO, the oldest leveraged SP500 ETF I know of goes back to 2006. All of it’s current outperformance essentially comes from the run up over the last 12 months.
"highly volatile" is the wrong word here. They have to be uncorrelated but not too volatile, or else they will lose too much due to volatility decay. (that's the problem with 3x gold in my opinion)
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Jags4186 »

tradri wrote: Mon Apr 26, 2021 6:22 am
Jags4186 wrote: Sun Apr 25, 2021 9:22 pm
No, because long term leveraged ETFs, on their own, haven’t really outperformed the index by astronomical amounts over the very long term. You need two highly volatile non-correlated assets in order to rebalance when one asset class crashes.

SSO, the oldest leveraged SP500 ETF I know of goes back to 2006. All of it’s current outperformance essentially comes from the run up over the last 12 months.
"highly volatile" is the wrong word here. They have to be uncorrelated but not too volatile, or else they will lose too much due to volatility decay.
No, volatility decay only occurs when the underlying index moves a lot but ultimately doesn’t increase. The SP500 could oscillate everyday 4000, 3980, 4000, for a year and not be very volatile. Your UPRO would lose roughly 0.15% in value every other day.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Jags4186 wrote: Mon Apr 26, 2021 6:31 am
No, volatility decay only occurs when the underlying index moves a lot but ultimately doesn’t increase. The SP500 could oscillate everyday 4000, 3980, 4000, for a year and not be very volatile. Your UPRO would lose roughly 0.15% in value every other day.
Volatility decay always occurs during long periods of time. Therefore, the asset has to produce enough returns to overcome its volatility decay.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheCleverest »

Jags4186 wrote: Sun Apr 25, 2021 9:22 pm No, because long term leveraged ETFs, on their own, haven’t really outperformed the index by astronomical amounts over the very long term. You need two highly volatile non-correlated assets in order to rebalance when one asset class crashes.

SSO, the oldest leveraged SP500 ETF I know of goes back to 2006. All of it’s current outperformance essentially comes from the run up over the last 12 months.
Thanks, Jag.

Sorry since I wasn't clear. I'm interested in learning more about a 2x fund (not 3x) and adding contributions regularly (instead of a set-it-and-forget-it approach without addl contributions)

So in my mind, and I could be wrong, the cash contributions would act as a non-correlated asset if equities go down/crashes.
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tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

I looked a bit deeper into the backtests and from what I can tell HFEA might not be the best strategy to hold long-term.

First of all, here is a comparison between 55% 3x S&P 500 / 45% 3x LTT and the S&P 500 from 1955 to 2020.
Image

HFEA underperformed the S&P 500 from 1972 to 1996, but overall it didn't do too bad.

However, when you compare it to small cap value over that time frame, it makes HFEA look much worse.
Image

HFEA underperformed small cap value from 1966 all the way up to 2017. (with much higher drawdowns, obviously)

All this doesn't look great for leveraged ETF strategies, especially when compared to factor investing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tradri wrote: Mon Apr 26, 2021 5:45 pm
HFEA underperformed small cap value from 1966 all the way up to 2017. (with much higher drawdowns, obviously)

All this doesn't look great for leveraged ETF strategies, especially when compared to factor investing.
Now you know why moto left HFEA and back to his SCV investment :wink:
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

jarjarM wrote: Mon Apr 26, 2021 6:09 pm
Now you know why moto left HFEA and back to his SCV investment :wink:
Yep, after looking at these charts I am also going to go towards factor investing. :wink:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Which is likely to be more representative of the next 10 to 15 years, 1955-1982 or 1982-2021?
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Hydromod wrote: Mon Apr 26, 2021 6:41 pm Which is likely to be more representative of the next 10 to 15 years, 1955-1982 or 1982-2021?
Nobody knows nothing.

But since today's interest rates resemble those in the 1950s, one could make the argument that history might repeat itself.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

I think hedgefundie made the assumption that monetary policies fundamentally changed in the 1980s and are unlikely to return.

As a practical matter, I would prefer to hold on to an approach that would have worked well for the last 30 years until it stops working, but be prepared to switch to some other tried-and-true approach if the economic climate changes adversely.
tradri
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tradri »

Hydromod wrote: Mon Apr 26, 2021 6:54 pm I think hedgefundie made the assumption that monetary policies fundamentally changed in the 1980s and are unlikely to return.

As a practical matter, I would prefer to hold on to an approach that would have worked well for the last 30 years until it stops working, but be prepared to switch to some other tried-and-true approach if the economic climate changes adversely.
Fair enough. I, personally, feel more comfortable following a strategy that didn't underperform the market for multiple decades in the past.
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