HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by tomphilly »

Afrofreak wrote: Mon Nov 15, 2021 9:06 am
tomphilly wrote: Mon Nov 15, 2021 9:01 am
Hfearless wrote: Mon Nov 15, 2021 5:44 am
adamhg wrote: Sun Nov 14, 2021 11:47 pm couldn't find any allocation of VXX that outperformed HFEA by either total return or risk adjusted returns
Were there any that were close enough to be useful for diversification purposes?
UPRO/TMF/VIXY 70/25/5 has outperformed HFEA 55/45 & 60/40 since the March 2020 crash - PV. I wouldn't run it for years, though. I'm just employing it as a short to medium term modification to HFEA given all the uncertainty around TMF.
And under what circumstances is that uncertainty going to alleviate? What indicators are you looking for to revert back to TMF?
A confluence of factors I guess, but maybe a key indicator would be a second consecutive decreasing CPI reading. Or even just at the first downward reading that surprises analysts. I guess the underlying question is what environment will make LTT's attractive to investors.
Last edited by tomphilly on Mon Nov 15, 2021 9:34 am, edited 1 time in total.
Hfearless
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hfearless »

tomphilly wrote: Mon Nov 15, 2021 9:01 am UPRO/TMF/VIXY 70/25/5 has outperformed HFEA 55/45 & 60/40 since the March 2020 crash - PV.
Does anything even mean anything over that time interval? 9000% UPRO would have performed even better.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Hfearless wrote: Mon Nov 15, 2021 9:33 am
tomphilly wrote: Mon Nov 15, 2021 9:01 am UPRO/TMF/VIXY 70/25/5 has outperformed HFEA 55/45 & 60/40 since the March 2020 crash - PV.
Does anything even mean anything over that time interval? 9000% UPRO would have performed even better.
But I've also showed in another PV that it performed comparably to HFEA since 2012 - the point I'm trying to make is, it may be a viable medium term flavor of HFEA and one that may also outperform vanilla HFEA during periods of inflation, if you're the type of investor that wants to play with HFEA.

I loaded a VXX simulation back to 2004.. here's since March 2009 (bottom of 2008 crash):

Image

Since 2004:

Image

Well, I guess the conclusion is it's not comparable since 2008. You could have held 70/30 UPRO/TMF during 2008 and had a similar drawdown and a better recovery. Still, I feel strongly enough that reducing TMF exposure at this moment makes sense - I'll hold it until I get spooked.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

tomphilly wrote: Mon Nov 15, 2021 9:21 am A confluence of factors I guess, but maybe a key indicator would be a second consecutive decreasing CPI reading. Or even just at the first downward reading that surprises analysts. I guess the underlying question is what environment will make LTT's attractive to investors.
One where inflation is not as bad as expected and thus rate hikes come later than expected or at least no premature rate hikes due to unexpected inflation. Basically what I'm getting at is, by waiting for the uncertainty to subside you're shooting yourself in the foot because TMF will have risen in price as those uncertainties alleviate. Investing is getting paid to take on risk.

As far as your allocation is concerned, it's hard to make an argument in favour of it when it has poorer risk-adjusted returns across both timeframes and poorer nominal returns in the longer backtest of the two. Your VIX component has a negative expected return whereas TMF does not, at least on a nominal basis.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

Does anyone know if there is a simulated dataset for TQQQ back to the early 2000s? As far as I can tell there is only a sim for UPRO and TMF provided by Samsdad?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Afrofreak wrote: Mon Nov 15, 2021 11:05 am
tomphilly wrote: Mon Nov 15, 2021 9:21 am A confluence of factors I guess, but maybe a key indicator would be a second consecutive decreasing CPI reading. Or even just at the first downward reading that surprises analysts. I guess the underlying question is what environment will make LTT's attractive to investors.
One where inflation is not as bad as expected and thus rate hikes come later than expected or at least no premature rate hikes due to unexpected inflation. Basically what I'm getting at is, by waiting for the uncertainty to subside you're shooting yourself in the foot because TMF will have risen in price as those uncertainties alleviate. Investing is getting paid to take on risk.
What's your take on ex-Fed officials predicting rate hikes to 4%? If their predictions come true, I would be in favor of reduced TMF exposure for some time yet.
Afrofreak wrote: Mon Nov 15, 2021 11:15 am Does anyone know if there is a simulated dataset for TQQQ back to the early 2000s? As far as I can tell there is only a sim for UPRO and TMF provided by Samsdad?
I have a TQQQ dataset that goes back to 2000 I can share - not sure where to upload it though.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

Afrofreak wrote: Mon Nov 15, 2021 11:15 am Does anyone know if there is a simulated dataset for TQQQ back to the early 2000s? As far as I can tell there is only a sim for UPRO and TMF provided by Samsdad?
@blackswan posted his work here and has TQQQ until 3/10/1999: viewtopic.php?p=5760615#p5760615

He used QQQ as the underlying, but it should actually be possible to go back to 1985 by using ^NDX instead
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

adamhg wrote: Mon Nov 15, 2021 11:35 am
Afrofreak wrote: Mon Nov 15, 2021 11:15 am Does anyone know if there is a simulated dataset for TQQQ back to the early 2000s? As far as I can tell there is only a sim for UPRO and TMF provided by Samsdad?
@blackswan posted his work here and has TQQQ until 3/10/1999: viewtopic.php?p=5760615#p5760615

He used QQQ as the underlying, but it should actually be possible to go back to 1985 by using ^NDX instead
Ah, this is the good stuff. Thanks for sharing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

tomphilly wrote: Mon Nov 15, 2021 11:30 am What's your take on ex-Fed officials predicting rate hikes to 4%? If their predictions come true, I would be in favor of reduced TMF exposure for some time yet.
I expect long-term interest rates will settle in the 2.5-3.5% range so to me those figures seem reasonable and I expect that the market also has similar numbers priced in. Again, if we stay the course and hike gradually, we will see a slight rise in the price of TMF. If we hike even slower than expected or cap off at 2% or lower, expect a large price increase. If the Fed hints at faster or steeper rate increases, expect large price decreases. The markets move relative to expectations, not relative to the present.

Just because we expect rates to increase does not automatically mean that TMF will decrease in price, in fact, the opposite, precisely because it is expected an increase in rates could still lead to an appreciation in TMF if expectations are met or exceeded.

Having said all that, my exposure to TMF is limited to 30% anyways but primarily that has to do with maximizing returns while still being able to handle the drawdowns.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Afrofreak wrote: Mon Nov 15, 2021 11:47 am I expect long-term interest rates will settle in the 2.5-3.5% range so to me those figures seem reasonable and I expect that the market also has similar numbers priced in. Again, if we stay the course and hike gradually, we will see a slight rise in the price of TMF. If we hike even slower than expected or cap off at 2% or lower, expect a large price increase. If the Fed hints at faster or steeper rate increases, expect large price decreases. The markets move relative to expectations, not relative to the present.
TMF would rise in a slowly rising rate environment? My understanding is the market has priced in a small rate increase (0.25%) next year and not much more. Do you mean these rate increases have been priced specifically in to TMF (not equities)? Seems like it might be...
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

tomphilly wrote: Mon Nov 15, 2021 11:57 am TMF would rise in a slowly rising rate environment? My understanding is the market has priced in a small rate increase (0.25%) next year and not much more. Do you mean these rate increases have been priced specifically in to TMF (not equities)? Seems like it might be..
Yes, precisely. According to the September dot plot from the Fed, they are expecting 1 increase of 0.25% in 2022 and then a further 2-3 in 2023 and another 3-5 in 2024. I would assume (though I could be wrong) that if we indeed follow this trajectory, we could see a slight rise in TMF price as expectations are confirmed. If rates increase more rapidly, that would spur a huge drop in price and similarly, if rates increase more gradually, expect a large increase in price. Think about it this way, if everyone already knows that rates will increase eventually, which fool is going to hold treasuries already issued at the same price as the new ones with a higher coupon rate? The existing treasuries have already been priced at a discount in anticipation that those issued next year will have a higher coupon rate.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Afrofreak wrote: Mon Nov 15, 2021 11:40 am
adamhg wrote: Mon Nov 15, 2021 11:35 am
Afrofreak wrote: Mon Nov 15, 2021 11:15 am Does anyone know if there is a simulated dataset for TQQQ back to the early 2000s? As far as I can tell there is only a sim for UPRO and TMF provided by Samsdad?
@blackswan posted his work here and has TQQQ until 3/10/1999: viewtopic.php?p=5760615#p5760615

He used QQQ as the underlying, but it should actually be possible to go back to 1985 by using ^NDX instead
Ah, this is the good stuff. Thanks for sharing.
Keep in mind that according to Siamond over at the simulated LETF return thread, it's more challenging to get ^NDX simulated back to 1980s due to lack of quality information on dividend, that's one of the main reason it wasn't done. I uses blackswan's sim data for my backtest as well.

P.S. I thought you only believe in QQQ back to 2004 and think everything before that is not relevant to future performance? :twisted:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

000 wrote: Sat Nov 13, 2021 11:00 pm I wonder if HEDGEFUNDIE will ever return with an update.

Has anyone been in contact with him (by PM or on another forum)?

Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
I'm sure he reads this thread with some amusement on his free time. :twisted:

As to the interest rate environment, it looks like some believe in moving to shorter duration (with higher leverage ratio via future), some moved to VIX future, and some move to higher equity ratio (i'm in this camp). We'll see how future will be but it's definitely interesting time.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

jarjarM wrote: Mon Nov 15, 2021 1:35 pm P.S. I thought you only believe in QQQ back to 2004 and think everything before that is not relevant to future performance?
Quite right! That's why I asked for early 2000s (meaning 2004). Having said that, I am interested to see how spectacularly this would've blown up in 2000-2002 as well even if I think it's irrelevant to future predictions.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Mon Nov 15, 2021 1:25 pm
tomphilly wrote: Mon Nov 15, 2021 11:57 am TMF would rise in a slowly rising rate environment? My understanding is the market has priced in a small rate increase (0.25%) next year and not much more. Do you mean these rate increases have been priced specifically in to TMF (not equities)? Seems like it might be..
Yes, precisely. According to the September dot plot from the Fed, they are expecting 1 increase of 0.25% in 2022 and then a further 2-3 in 2023 and another 3-5 in 2024. I would assume (though I could be wrong) that if we indeed follow this trajectory, we could see a slight rise in TMF price as expectations are confirmed. If rates increase more rapidly, that would spur a huge drop in price and similarly, if rates increase more gradually, expect a large increase in price. Think about it this way, if everyone already knows that rates will increase eventually, which fool is going to hold treasuries already issued at the same price as the new ones with a higher coupon rate? The existing treasuries have already been priced at a discount in anticipation that those issued next year will have a higher coupon rate.
If rates rise, the price of bonds falls and so does TMF I assume. No matter how slowly rates rise. The one exception is that the bonds are getting shorter in duration, which causes their price to rise (roll yield). The expectations of future interest rate increases are baked into the current coupon. So for example a 30 year bond issued today with a 1.8% coupon ... if rates rise .25% the price of that bond will fall. Even though the bond was issued with a 1.8% coupon, the market expected return is substantially less because the market expects 30 year rates to rise.

Short term rates are expected to rise nearly 0.5% per year over the next 2 years. The instantaneous rate 2 years hence is nearly 1% currently although this does include some term premium, the term premium is near zero right now, possibly even negative.

https://fred.stlouisfed.org/series/THREEFF2

Long term rates are expected to rise much more slowly. But this would still translate into price decreases and cut into the return you'd expect from the coupon. And there is not much roll yield on the 30 year .. at times it has gone inverted so the roll yield is negative.

The market expected return from LTT right now is about 0.5%. Leveraged 3x that is 1.5% minus the 0.9% fee = 0.6%.
Last edited by skierincolorado on Mon Nov 15, 2021 2:14 pm, edited 5 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

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jarjarM wrote: Mon Nov 15, 2021 1:38 pm
000 wrote: Sat Nov 13, 2021 11:00 pm I wonder if HEDGEFUNDIE will ever return with an update.

Has anyone been in contact with him (by PM or on another forum)?

Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
I'm sure he reads this thread with some amusement on his free time. :twisted:

As to the interest rate environment, it looks like some believe in moving to shorter duration (with higher leverage ratio via future), some moved to VIX future, and some move to higher equity ratio (i'm in this camp). We'll see how future will be but it's definitely interesting time.
What are your ratios, out of interest?
Last edited by tomphilly on Mon Nov 15, 2021 2:06 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tomphilly wrote: Mon Nov 15, 2021 2:00 pm
jarjarM wrote: Mon Nov 15, 2021 1:38 pm
000 wrote: Sat Nov 13, 2021 11:00 pm I wonder if HEDGEFUNDIE will ever return with an update.

Has anyone been in contact with him (by PM or on another forum)?

Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
I'm sure he reads this thread with some amusement on his free time. :twisted:

As to the interest rate environment, it looks like some believe in moving to shorter duration (with higher leverage ratio via future), some moved to VIX future, and some move to higher equity ratio (i'm in this camp). We'll see how future will be but it's definitely interesting time.
What are your ratios, out of interest?
I'm at 85/15 right now, basically skipping rebalancing for the last several quarters. Once 10yr rate is >2%, I'll most likely go back to rebalancing into TMF. For now though, given the interest rate/inflation environment, I would feel quite uneasy putting too much $$$ into 3x LTT.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

Afrofreak wrote: Mon Nov 15, 2021 1:39 pm
jarjarM wrote: Mon Nov 15, 2021 1:35 pm P.S. I thought you only believe in QQQ back to 2004 and think everything before that is not relevant to future performance?
Quite right! That's why I asked for early 2000s (meaning 2004). Having said that, I am interested to see how spectacularly this would've blown up in 2000-2002 as well even if I think it's irrelevant to future predictions.
I'd love to see how my blended UPRO, TMF, TQQQ did back then too. How do you get the simulated data into portfolio visualizer. I have never done that.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

Afrofreak wrote: Sun Nov 14, 2021 10:43 pm
DMoogle wrote: Sun Nov 14, 2021 10:38 pm So, this is mostly true, but there is a small nuance here that is often overlooked; just because a specific outcome is expected and priced into the market, doesn't mean that when that outcome actually happens, it won't have an effect on the market.

That's probably confusing. Let me give an example:
Suppose Congress has a STRONG CHANCE (say, 80%) to pass a bill that, if passed, is good for the equities market. The market learns of this, and increases 2% accordingly. Then the bill passes, and the market increases another 0.5% immediately as a result. Why did the market increase an additional 0.5%? Simple: the original increase of 2% was based on the strong chance of the bill passing, while the additional 0.5% gain was due to that "strong chance" becoming 100%. It accounts for the elimination of outlier events.

My point is that, just because something is expected, doesn't mean it won't affect the market once it actually happens, because, in an efficient market, the market should be pricing in outlier outcomes as well.
Beat me to it. This is very critical. Just because an event is expected to occur doesn't mean that there is no opportunity for profit remaining. Case in point was the Fed meeting 2 weeks ago. They did exactly what they've been saying they were going to do for at least the past 2 months and yet when it was confirmed, markets still rocketed up.
which begs the question, how does one profit from a potential hawkish change in fed policy? deleverging was my first thought.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

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LeverageWBeverage wrote: Mon Nov 15, 2021 2:05 pm
Afrofreak wrote: Mon Nov 15, 2021 1:39 pm
jarjarM wrote: Mon Nov 15, 2021 1:35 pm P.S. I thought you only believe in QQQ back to 2004 and think everything before that is not relevant to future performance?
Quite right! That's why I asked for early 2000s (meaning 2004). Having said that, I am interested to see how spectacularly this would've blown up in 2000-2002 as well even if I think it's irrelevant to future predictions.
I'd love to see how my blended UPRO, TMF, TQQQ did back then too. How do you get the simulated data into portfolio visualizer. I have never done that.
You need the pro plan. Let me know your ratios, I can provide a backtest to 2000 I think.
jarjarM wrote: Mon Nov 15, 2021 2:03 pm I'm at 85/15 right now
That's pretty brave. Good to know though, thanks. I used to run 80/20 with a target volatility model. It was fun, but I got spooked. I would go back to this if I felt the market had bottomed out after a crash.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

skierincolorado wrote: Mon Nov 15, 2021 1:56 pm If rates rise, the price of bonds falls and so does TMF I assume. No matter how slowly rates rise. The one exception is that the bonds are getting shorter in duration, which causes their price to rise. The expectations of future interest rate increases are baked into the current coupon. So for example a 30 year bond issued today with a 1.8% coupon ... if rates rise .25% the price of that bond will fall.
If it is guaranteed that when rates rise the price of bonds falls, then you could make a no-risk, guaranteed return simply by shorting bonds in anticipation of rising rates. If rates rise precisely as the Fed said they would, treasuries will increase (slightly) in price, not decrease. The benchmark is future expectations, not current reality. This is why following the conclusion of the November Fed meeting, TLT/TMF appreciated in price despite the fact that the Fed stated that they were going to begin tapering which will segue into raising rates. What should've been a net negative for TLT actually was a positive because the Fed had already signaled that they were going to begin tapering months before. The confirmation of the expectation at the November meeting with no unexpected bad or good news was enough to push up treasuries.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

tomphilly wrote: Mon Nov 15, 2021 2:07 pm
LeverageWBeverage wrote: Mon Nov 15, 2021 2:05 pm
Afrofreak wrote: Mon Nov 15, 2021 1:39 pm
jarjarM wrote: Mon Nov 15, 2021 1:35 pm P.S. I thought you only believe in QQQ back to 2004 and think everything before that is not relevant to future performance?
Quite right! That's why I asked for early 2000s (meaning 2004). Having said that, I am interested to see how spectacularly this would've blown up in 2000-2002 as well even if I think it's irrelevant to future predictions.
I'd love to see how my blended UPRO, TMF, TQQQ did back then too. How do you get the simulated data into portfolio visualizer. I have never done that.
You need the pro plan. Let me know your ratios, I can provide a backtest to 2000 I think.
jarjarM wrote: Mon Nov 15, 2021 2:03 pm I'm at 85/15 right now
That's pretty brave. Good to know though, thanks. I used to run 80/20 with a target volatility model. It was fun, but I got spooked. I would go back to this if I felt the market had bottomed out after a crash.
Thank you! I am at
UPRO 27.5%
TQQQ 27.5%
TMF 45%
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Mon Nov 15, 2021 2:14 pm
skierincolorado wrote: Mon Nov 15, 2021 1:56 pm If rates rise, the price of bonds falls and so does TMF I assume. No matter how slowly rates rise. The one exception is that the bonds are getting shorter in duration, which causes their price to rise. The expectations of future interest rate increases are baked into the current coupon. So for example a 30 year bond issued today with a 1.8% coupon ... if rates rise .25% the price of that bond will fall.
If it is guaranteed that when rates rise the price of bonds falls, then you could make a no-risk, guaranteed return simply by shorting bonds in anticipation of rising rates. If rates rise precisely as the Fed said they would, treasuries will increase (slightly) in price, not decrease. The benchmark is future expectations, not current reality. This is why following the conclusion of the November Fed meeting, TLT/TMF appreciated in price despite the fact that the Fed stated that they were going to begin tapering which will segue into raising rates. What should've been a net negative for TLT actually was a positive because the Fed had already signaled that they were going to begin tapering months before. The confirmation of the expectation at the November meeting with no unexpected bad or good news was enough to push up treasuries.
No you can't simply short bonds without also paying out the coupon. While the short position should make money on the price, because prices are expected to fall, they would lose more money paying out the coupon.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

LeverageWBeverage wrote: Mon Nov 15, 2021 2:14 pm Thank you! I am at
UPRO 27.5%
TQQQ 27.5%
TMF 45%
Here you go

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

Post by jarjarM »

tomphilly wrote: Mon Nov 15, 2021 2:07 pm
jarjarM wrote: Mon Nov 15, 2021 2:03 pm I'm at 85/15 right now
That's pretty brave. Good to know though, thanks. I used to run 80/20 with a target volatility model. It was fun, but I got spooked. I would go back to this if I felt the market had bottomed out after a crash.
Yeah, I actually looked at target volatility and currently running a modified version of adaptive asset allocation in my taxable with TQQQ/URTY/FAS/UPRO/UTSL. The problem is that last March was an extraordinary event that we never experience before (both the drop and the strong fed intervention later on). I'm hoping market dynamic is back to more normal state (VIX is still elevated though).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

tomphilly wrote: Mon Nov 15, 2021 2:21 pm
LeverageWBeverage wrote: Mon Nov 15, 2021 2:14 pm Thank you! I am at
UPRO 27.5%
TQQQ 27.5%
TMF 45%
Here you go

Image
The image is broken on my end. Maybe I need the pro version to view it? Thanks for trying. What was the gist? Did it survive the financial crisis?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

LeverageWBeverage wrote: Mon Nov 15, 2021 2:28 pm The image is broken on my end. Maybe I need the pro version to view it? Thanks for trying. What was the gist? Did it survive the financial crisis?
That's weird - it's an imgur upload - try: https://i.imgur.com/0aT1P1v.png
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

UPRO/TQQQ/TMF: 18.5% CAGR; 30.5% stdev.; 73.8% max drawdown; 0.66 Sharpe
UPRO/TMF: 17.2% CAGR; 26.5% stdev; 61.7% max drawdown; 0.67 Sharpe
Vanguard 500: 6.5% CAGR; 15.2% stdev; 51.0% max drawdown; 0.39 Sharpe

Reminder that Portfolio Visualizer only looks at and provides month-end results. So the max drawdowns during the financial crisis were likely higher. There isn't any easy way around this limitation AFAIK.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

LeverageWBeverage wrote: Mon Nov 15, 2021 2:28 pm The image is broken on my end. Maybe I need the pro version to view it? Thanks for trying. What was the gist? Did it survive the financial crisis?
I can see it fine. Your allocation would have survived the GFC and would currently be slightly outperforming HFEA.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

skierincolorado wrote: Mon Nov 15, 2021 2:15 pm No you can't simply short bonds without also paying out the coupon. While the short position should make money on the price, because prices are expected to fall, they would lose more money paying out the coupon.
Yes, paying out the coupon would affect your return while shorting, but we are talking about a 1.49% 12M trailing yield and a 1.95% avrg. yield to maturity. TLT has decreased almost the same amount today. What if the Fed said today that tomorrow they will be increasing interest rates. Do you think TLT will plummet today given the altered expectations for the future or tomorrow when it actually happens? Of course the prices are going to drop the moment the news is announced otherwise you could simply short treasuries today in anticipation that they rates will rise tomorrow thus bring treasury prices down. The coupon payment is irrelevant. It's the exact same principle except the Fed announced rising rates last year and the rates are expected to rise not tomorrow but next year. It's fully priced in to the downside and mostly priced in to the upside, so if we continue on this path the Fed has set with no hiccups, TLT will rise slightly overall.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

DMoogle wrote: Mon Nov 15, 2021 2:34 pm UPRO/TQQQ/TMF: 18.5% CAGR; 30.5% stdev.; 73.8% max drawdown; 0.66 Sharpe
UPRO/TMF: 17.2% CAGR; 26.5% stdev; 61.7% max drawdown; 0.67 Sharpe
Vanguard 500: 6.5% CAGR; 15.2% stdev; 51.0% max drawdown; 0.39 Sharpe

Reminder that Portfolio Visualizer only looks at and provides month-end results. So the max drawdowns during the financial crisis were likely higher. There isn't any easy way around this limitation AFAIK.
I just checked on my backtest sim using the same data. Max drawdown in GFC is 81% (using daily closing value) and most of the out performance is from the covid recovery.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 000 »

jarjarM wrote: Mon Nov 15, 2021 1:38 pm
000 wrote: Sat Nov 13, 2021 11:00 pm I wonder if HEDGEFUNDIE will ever return with an update.

Has anyone been in contact with him (by PM or on another forum)?

Sure is interesting to ponder this strategy versus possible macro environments in the 2020s.
I'm sure he reads this thread with some amusement on his free time. :twisted:

As to the interest rate environment, it looks like some believe in moving to shorter duration (with higher leverage ratio via future), some moved to VIX future, and some move to higher equity ratio (i'm in this camp). We'll see how future will be but it's definitely interesting time.
What about stagflation?

Any thoughts about including, I don't know, something like JNUG? :twisted:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

000 wrote: Mon Nov 15, 2021 2:50 pm What about stagflation?

Any thoughts about including, I don't know, something like JNUG? :twisted:
Yeah, this was discussed extensively in the first thread and essentially is the killer of this strategy. I actually started with UGLD as part of my portfolio but have to abandon it when it was delisted. Although I am seriously looking into JNUG/NUGT as an added component as they become a valuable play in the inflation environment.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 000 »

jarjarM wrote: Mon Nov 15, 2021 3:02 pm I actually started with UGLD as part of my portfolio but have to abandon it when it was delisted. Although I am seriously looking into JNUG/NUGT as an added component as they become a valuable play in the inflation environment.
Look at the drawdown on those leveraged miners ETFs tho. :shock:

I wonder if the unlevered GDXJ provides enough volatility?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

jarjarM wrote: Mon Nov 15, 2021 2:48 pm
DMoogle wrote: Mon Nov 15, 2021 2:34 pm UPRO/TQQQ/TMF: 18.5% CAGR; 30.5% stdev.; 73.8% max drawdown; 0.66 Sharpe
UPRO/TMF: 17.2% CAGR; 26.5% stdev; 61.7% max drawdown; 0.67 Sharpe
Vanguard 500: 6.5% CAGR; 15.2% stdev; 51.0% max drawdown; 0.39 Sharpe

Reminder that Portfolio Visualizer only looks at and provides month-end results. So the max drawdowns during the financial crisis were likely higher. There isn't any easy way around this limitation AFAIK.
I just checked on my backtest sim using the same data. Max drawdown in GFC is 81% (using daily closing value) and most of the out performance is from the covid recovery.
That's a huge difference. Were our Vanguard benchmarks identical?

My settings:

Image

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

Post by jarjarM »

tomphilly wrote: Mon Nov 15, 2021 3:27 pm
jarjarM wrote: Mon Nov 15, 2021 2:48 pm
DMoogle wrote: Mon Nov 15, 2021 2:34 pm UPRO/TQQQ/TMF: 18.5% CAGR; 30.5% stdev.; 73.8% max drawdown; 0.66 Sharpe
UPRO/TMF: 17.2% CAGR; 26.5% stdev; 61.7% max drawdown; 0.67 Sharpe
Vanguard 500: 6.5% CAGR; 15.2% stdev; 51.0% max drawdown; 0.39 Sharpe

Reminder that Portfolio Visualizer only looks at and provides month-end results. So the max drawdowns during the financial crisis were likely higher. There isn't any easy way around this limitation AFAIK.
I just checked on my backtest sim using the same data. Max drawdown in GFC is 81% (using daily closing value) and most of the out performance is from the covid recovery.
That's a huge difference. Were our Vanguard benchmarks identical?
It should be but PV's max drawdown in the normal version is using month end data even if one upload daily data (that's it was years ago when that function was still available) and my calculation is based on daily closing value which takes into account of intra-month drawdown.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Mon Nov 15, 2021 2:43 pm
skierincolorado wrote: Mon Nov 15, 2021 2:15 pm No you can't simply short bonds without also paying out the coupon. While the short position should make money on the price, because prices are expected to fall, they would lose more money paying out the coupon.
Yes, paying out the coupon would affect your return while shorting, but we are talking about a 1.49% 12M trailing yield and a 1.95% avrg. yield to maturity. TLT has decreased almost the same amount today. What if the Fed said today that tomorrow they will be increasing interest rates. Do you think TLT will plummet today given the altered expectations for the future or tomorrow when it actually happens? Of course the prices are going to drop the moment the news is announced otherwise you could simply short treasuries today in anticipation that they rates will rise tomorrow thus bring treasury prices down. The coupon payment is irrelevant. It's the exact same principle except the Fed announced rising rates last year and the rates are expected to rise not tomorrow but next year. It's fully priced in to the downside and mostly priced in to the upside, so if we continue on this path the Fed has set with no hiccups, TLT will rise slightly overall.
When interest rates rise, bond prices fall. Long (and short) interest rates are likely to rise, therefore bond and TMF prices are likely to fall. It's as simple as that.

And yet I agree all relevant information about future rates are baked into current prices and yields. Perhaps it would help to go through an example.

TMF buys today a 30yr 2% coupon bond trading at par for $1000. The market expects both short and long term interest rates to increase. Assuming this expectation is realized, 30 yr rates a few years from now are *expected* to be around 2.5% (according to market forward contracts). The original bond will now trade substantially less than $1000. We will likely see price decreases of around 1.5% per year... which our coupon of 2% offsets and we net around 0.5%. The market's expectation of future rate increases were baked into the original 2% coupon. If the market did not expect future interest rates to be higher, 30 year interest rates would likely be substantially less than 2%.

The market expected return on TLT for the next few years is around 0.5% right now - substantially less than the YTM or coupon - because interest rates are expected to rise. The market considers a 0.5% return sufficient compensation currently for the various risks of owning bonds. Just because rates are expected to be around 2.5% several years from now does not mean that rates will be 2.5% today.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

skierincolorado wrote: Mon Nov 15, 2021 4:01 pm TMF buys today a 30yr 2% coupon bond trading at par for $1000. The market expects both short and long term interest rates to increase. Assuming this expectation is realized, 30 yr rates a few years from now are likely to be around 2.5%. The original bond will now trade substantially less than $1000. We will likely see price decreases of around 1.5% per year... which our coupon of 2% offsets and we net around 0.5%. The market's expectation of future rate increases were baked into the original 2% coupon. If the market did not expect future interest rates to be higher, 30 year interest rates would likely be substantially less than 2%.

The market expected return on TLT for the next few years is around 0.5% right now - substantially less than the YTM or coupon - because interest rates are expected to rise. The market considers a 0.5% return sufficient compensation currently for the various risks of owning bonds. Just because rates are expected to be around 2.5% several years from now does not mean that rates will be 2.5% today.
That still doesn't make sense though. You're arguing that the interest payments will offset (and then some) the amount TLT drops once the rate hike is announced: 2% - 1.5% = 0.5%. If that is true, you would still be able to achieve a risk-free positive rate of return by shorting bonds for a period of 6 months or less, since using your own numbers: 2% per year * 6/12 = 1% loss but 1.5% gain in price decrease. Not very hard to time given that we know that at current pace tapering is supposed to end in June and the Fed expects 1 rate hike following end of tapering in 2022. Similarly, since we expect 3-5 rate increases in 2024, do each of those also correspond to 1.5% price decrease per rate hike? If so, you'd get a risk-free return of minimum 2.5%, roughly, even if you held them for the entire year and paid a full year's worth of interest payments. The coupon payment doesn't matter.

What you're proposing would open up a very easy and simple arbitrage opportunity which is why it makes no sense. The mistake you made in your hypothetical calculation is assuming that the price of the original bond changes when the interest rate is increased. No, the original bond would have been trading at a discount this entire time because the market expects short and long term interest rates to increase. On the day an interest rate hike is actually announced, we should see no change in the price of TLT/TMF (or a small price increase since the element of uncertainty is eliminated) provided that the interest rate hike was expected. It's priced in which is why an arbitrage is not possible. People who refuse to buy bonds either a.) Think that the Fed will have to react sooner and with more intensity than they say they will. (And there are a lot of people in this camp which makes me think that there's probably more than 1 hike priced in for 2022 right now, thus if we do only see 1 hike as the Fed expects, TLT could actually perform really well next year.) Or b.) Are going to be woefully disappointed when treasuries don't move once the interest rate hike is actually implemented.
skierincolorado wrote: Mon Nov 15, 2021 4:01 pm When interest rates rise, bond prices fall. Long (and short) interest rates are likely to rise, therefore bond and TMF prices are likely to fall. It's as simple as that.
No, when interest rates rise unexpectedly bond prices fall.
Last edited by Afrofreak on Mon Nov 15, 2021 4:50 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Mon Nov 15, 2021 4:39 pm
skierincolorado wrote: Mon Nov 15, 2021 4:01 pm TMF buys today a 30yr 2% coupon bond trading at par for $1000. The market expects both short and long term interest rates to increase. Assuming this expectation is realized, 30 yr rates a few years from now are likely to be around 2.5%. The original bond will now trade substantially less than $1000. We will likely see price decreases of around 1.5% per year... which our coupon of 2% offsets and we net around 0.5%. The market's expectation of future rate increases were baked into the original 2% coupon. If the market did not expect future interest rates to be higher, 30 year interest rates would likely be substantially less than 2%.

The market expected return on TLT for the next few years is around 0.5% right now - substantially less than the YTM or coupon - because interest rates are expected to rise. The market considers a 0.5% return sufficient compensation currently for the various risks of owning bonds. Just because rates are expected to be around 2.5% several years from now does not mean that rates will be 2.5% today.
That still doesn't make sense though. You're arguing that the interest payments will offset (and then some) the amount TLT drops once the rate hike is announced: 2% - 1.5% = 0.5%. If that is true, you would still be able to achieve a risk-free positive rate of return by shorting bonds for a period of 6 months or less, since using your own numbers: 2% per year * 6/12 = 1% loss but 1.5% gain in price decrease. Not very hard to time given that we know that at current pace tapering is supposed to end in June and the Fed expects 1 rate hike following end of tapering in 2022. Similarly, since we expect 3-5 rate increases in 2024, do each of those also correspond to 1.5% price decrease per rate hike? If so, you'd get a risk-free return of minimum 2.5%, roughly, even if you held them for the entire year and paid a full year's worth of interest payments. The coupon payment doesn't matter.

What you're proposing would open up a very easy and simple arbitrage opportunity which is why it makes no sense. The mistake you made in your hypothetical calculation is assuming that the price of the original bond changes when the interest rate is increased. No, the original bond would have been trading at a discount this entire time because the market expects short and long term interest rates to increase. On the day an interest rate hike is announced, we should see no change in the price of TLT/TMF (or a small price increase since the element of uncertainty is eliminated) provided that the interest rate hike was expected.
skierincolorado wrote: Mon Nov 15, 2021 4:01 pm When interest rates rise, bond prices fall. Long (and short) interest rates are likely to rise, therefore bond and TMF prices are likely to fall. It's as simple as that.
No, when interest rates rise unexpectedly bond prices fall.
You are confusing Fed rate hikes with interest rate increases. Nobody knows exactly when long-term rate increases are going to increase, but they are expected to increase gradually over the course of the next several years. There is no arb opportunity. If you short bonds, you will reap the gradual price decrease, but you will have to pay out the coupons, and overall you would expect to lose money. If we know that long term interest rates were going to go up by some significant amount on a particular day, then yes you could short long-term bonds for just that day. That's not the case though. Long term interest rates are expected *by the market* to increase gradually for the next several years. This will translate into price decreases of currently issued long term bonds. There is no opportunity to short because the decrease in price is gradual and is offset by the coupons which the short position would have to pay out.

There was a period back several months ago where the expected return of bonds was negative, and it might have made sense to short bonds. Of course one might still consider owning bonds with negative expected return due to the negative correlation with equities.

Afrofreak wrote: Mon Nov 15, 2021 4:39 pm No, when interest rates rise unexpectedly bond prices fall.
Again, this is mathematically false. If long term interest rates/yield rise, unexpected or expected, long term bond prices will fall. This basic mathematical relationship underpins bond price calculators.


Thus I repeat, the market expectation is that the price of TLT will fall. Fortunately the current yield is slightly more than the expected price decrease and dividends are expected to be slightly larger than the price decrease.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

Oh, ok, we've been talking about two different things here this entire time. I agree with everything you said then. The point is, the Fed interest rate hikes are priced in, so it makes no sense not to invest in Treasuries now in anticipation of those rate hikes, as if TLT/TMF is magically going to drop in price the day the hike is announced. It's already priced in.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Afrofreak wrote: Mon Nov 15, 2021 5:02 pm Oh, ok, we've been talking about two different things here this entire time. I agree with everything you said then. The point is, the Fed interest rate hikes are priced in, so it makes no sense not to invest in Treasuries now in anticipation of those rate hikes, as if TLT/TMF is magically going to drop in price the day the hike is announced. It's already priced in.
I was afraid of that. The one thing I would say is that while the rate hikes are obviously priced in, we should still expect some price decrease on TLT as long term interest rates increase gradually. By my calculations, the expected return on TLT is around 0.5% after considering the current yield, the roll yield, and future market expected (gradual) rate increases. In much of Europe, the expected return on bonds is still negative (even in countries where the nominal yield is positive). And the expected return on bonds in the U.S. was also probably slightly negative in late 2020.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

Afrofreak wrote: Mon Nov 15, 2021 5:02 pm Oh, ok, we've been talking about two different things here this entire time. I agree with everything you said then. The point is, the Fed interest rate hikes are priced in, so it makes no sense not to invest in Treasuries now in anticipation of those rate hikes, as if TLT/TMF is magically going to drop in price the day the hike is announced. It's already priced in.
What of the Fed has to raise rates faster? Thats the concern - inflation is more robust than they expect. The impact on TMF could be substantial at the same time UPRO would be getting hit hard
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

Meaty wrote: Mon Nov 15, 2021 7:41 pm
Afrofreak wrote: Mon Nov 15, 2021 5:02 pm Oh, ok, we've been talking about two different things here this entire time. I agree with everything you said then. The point is, the Fed interest rate hikes are priced in, so it makes no sense not to invest in Treasuries now in anticipation of those rate hikes, as if TLT/TMF is magically going to drop in price the day the hike is announced. It's already priced in.
What of the Fed has to raise rates faster? Thats the concern - inflation is more robust than they expect. The impact on TMF could be substantial at the same time UPRO would be getting hit hard
Yes no doubt about that. If the Fed has to raise rates faster than expected due to inflation it's going to be a bumpy ride ahead. But if the Fed raises as quickly or slower than expected, TMF could perform quite well.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

skierincolorado wrote: Mon Nov 15, 2021 5:42 pm
Afrofreak wrote: Mon Nov 15, 2021 5:02 pm Oh, ok, we've been talking about two different things here this entire time. I agree with everything you said then. The point is, the Fed interest rate hikes are priced in, so it makes no sense not to invest in Treasuries now in anticipation of those rate hikes, as if TLT/TMF is magically going to drop in price the day the hike is announced. It's already priced in.
I was afraid of that. The one thing I would say is that while the rate hikes are obviously priced in, we should still expect some price decrease on TLT as long term interest rates increase gradually. By my calculations, the expected return on TLT is around 0.5% after considering the current yield, the roll yield, and future market expected (gradual) rate increases. In much of Europe, the expected return on bonds is still negative (even in countries where the nominal yield is positive). And the expected return on bonds in the U.S. was also probably slightly negative in late 2020.
What is your data source for expected future 30-year rates or 30-year rate increases? Interest rate futures are only available about 10 years into the future.

Regarding Europe: Don't forget that the carry (as in yield to maturity plus current rolldown return minus current funding rate) is positive in Europe. Term premium is difficult to estimate, but many models think it's negative. Question is are market yields determined by absolute returns, by the carry vs the risk-free rate, or by the estimated term premia. Probably a combination.
Also don't forget that all countries in Europe except Germany are thought to carry a credit risk, and returns therefore include a credit risk premium.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

tomphilly wrote: Mon Nov 15, 2021 2:21 pm
LeverageWBeverage wrote: Mon Nov 15, 2021 2:14 pm Thank you! I am at
UPRO 27.5%
TQQQ 27.5%
TMF 45%
Here you go

Image
Thanks again. My work was blocking the images. I could see them when I got home. Very helpful. However, starting at 2000 is the worst possible time to judge nasdaq. You get in at the absolute peak before the crash but don't benefit at all from the run up before to help cushion the blow some. Starting at 1996 or 2004 I would think would paint a very different picture.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

I've gone and jumped in.

An old Simple IRA is now 100% PSLDX.

One of our Roths is now allocated as follows:

25% UPRO
25% TMF
50% IXUS

based on my limited understanding of these things, this gives me a 125/75 stock/bond exposure with a 60/40 US/International split.

PSLDX + UPRO + TMF = ~15% of our portfolio. So this is nothing crazy, but certainly significant enough to result in real under or overperformance.

I'm not a huge backtest guy with this kind of stuff, but going back to 2009, this roughly doubled the CAGR of my benchmark VT with a 5% lower max drawdown.

https://www.portfoliovisualizer.com/bac ... tion3_1=25

i have no illusions of identical performance for the next 10 years, but we shall see.
Last edited by bgf on Tue Nov 16, 2021 9:25 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

bgf wrote: Tue Nov 16, 2021 9:11 am I've gone and jumped in.

An old Simple IRA is now 100% PSLDX.

One of our Roths is now allocated as follows:

25% UPRO
25% TMF
50% IXUS

based on my limited understanding of these things, this gives me a 125/75 stock/bond exposure with a 60/40 US/International split.

PSLDX + UPRO + TMF = ~15% of our portfolio. So this is nothing crazy, but certainly significant enough to result in real under or overperformance.

I'm not a huge backtest guy with this kind of stuff, but going back to 2009, this roughly doubled the CAGR of my benchmark VT with a 5% lower max drawdown.

https://www.portfoliovisualizer.com/bac ... tion3_1=25

i have no illusions is identical performance for the next 10 years, but we shall see.
Very nice!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

tomphilly wrote: Mon Nov 15, 2021 9:44 am But I've also showed in another PV that it performed comparably to HFEA since 2012 - the point I'm trying to make is, it may be a viable medium term flavor of HFEA and one that may also outperform vanilla HFEA during periods of inflation, if you're the type of investor that wants to play with HFEA.
It is comparable. My take is it's 70% UPRO in a raging bull market. VIXY is just water-down-a-froghole that is draining out the excess UPRO. Therefore, it's comparable, but at least in that time frame, it doesn't give you any indication that it's okay. It might be.

I tried VIX hedging this year, and there are several threads where people went into it in some detail. Hasn't paid off, but of course, that's a good problem to have.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by investor.was.here »

Thoughts on substituting mHFEA (45/55 UPRO/TYA) with 75/25 1.5x-NTSX/TYA in a taxable account?

The idea here is to use margin to lever up the NTSX rather than use UPRO. NTSX holds unlevered equities, avoiding rollover costs, and has a higher maintenance margin. We now have an additional margin cost, but I think rollover cost and tax savings would offset it (at 1.58% APY on IBKR). Not sure at what rate it'd be less attractive. It should be resistant to a margin call and we can easily add NTSE/NTSI to the mix for international exposure, if desired.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

LeverageWBeverage wrote: Tue Nov 16, 2021 7:07 am ... However, starting at 2000 is the worst possible time to judge nasdaq. You get in at the absolute peak before the crash but don't benefit at all from the run up before to help cushion the blow some. Starting at 1996 or 2004 I would think would paint a very different picture.
Just beware of bias data. IMO, starting at 1996, where tech sector is just forming, or 2004, after significant attrition in the sector, will present a significant different view when comparing to future, where there's already plenty of investment capitals flowed into tech in the last 10+ years.
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