HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by ChinchillaWhiplash »

tomphilly wrote: Fri Jan 21, 2022 10:09 am
Semantics wrote: Fri Jan 21, 2022 10:01 am Even SPY and VOO are not considered substantially identical, so QQQ and TQQQ are absolutely not.
That seems crazy, they're virtually a single line on PV dating back to 2011. Are UPRO and SPXL considered different?
Very different since their holdings are not the same at all
zeejee
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zeejee »

I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
ChinchillaWhiplash
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChinchillaWhiplash »

Semantics wrote: Fri Jan 21, 2022 10:01 am
parval wrote: Fri Jan 21, 2022 9:22 am
ChinchillaWhiplash wrote: Fri Jan 21, 2022 9:03 am Don’t know if this has been discussed before but has anyone used their taxable to do mega TLH? I’m buying VOO, QQQ, and a SC index fund. If any of these drop 20% or more I will sell for a loss, claim loss on taxes and buy UPRO, TQQQ, TNA. Seems like a win win. Have your cake and eat it too? Anybody doing this?
Are you sure those aren't close enough for wash sale? I mean QQQ for TQQQ seems super close, but I don't work for IRS
Even SPY and VOO are not considered substantially identical, so QQQ and TQQQ are absolutely not.
Looks like the only common ground is that they both hold Microsoft and Apple. That’s it, so safe for sure.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

tomphilly wrote: Fri Jan 21, 2022 10:09 am
Semantics wrote: Fri Jan 21, 2022 10:01 am Even SPY and VOO are not considered substantially identical, so QQQ and TQQQ are absolutely not.
That seems crazy, they're virtually a single line on PV dating back to 2011. Are UPRO and SPXL considered different?
Some argue that because they're from different fund companies, they're different. So far IRS has not issue a ruling on what defines as substantially identical.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

zeejee wrote: Fri Jan 21, 2022 10:46 am I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
There was some extensive discussion upthread a while back. The conclusion was high costs would make it unattractive. I seem to remember something about capped upside, but I could be wrong on that.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

zeejee wrote: Fri Jan 21, 2022 10:46 am I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
This was discussed extensively in this thread, I think one around mid-2020 and one just few months ago. The conclusion generally is that the borrowing cost is quite high (not being included in the PV simulation) and also big part of the out performance is due to long volatility decay of SPXU/TMV during the bull market run. Check out page 39/113 and maybe 10 pages back.
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hillclimber
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

tomphilly wrote: Fri Jan 21, 2022 10:09 am
Semantics wrote: Fri Jan 21, 2022 10:01 am Even SPY and VOO are not considered substantially identical, so QQQ and TQQQ are absolutely not.
That seems crazy, they're virtually a single line on PV dating back to 2011. Are UPRO and SPXL considered different?
I think the benefits are small enough that the IRS doesn't seem to care about it, and there is some legal ambiguity, since the original wash sale rule predates index funds. That may change in the future though.To be safe, betterment flips between etfs that track different indices.
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tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

At -15.23% HFEA 60/40 is (so far) just shy of the worst monthly drawdown in nearly 13 years, which was Oct 2018 (-16.11%). Thankfully, TMF has come to the rescue the past 2 days.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChinchillaWhiplash »

After digging into each ETF’s holding, the leveraged funds do hold the underlying index in addition to the different contracts. The funds are not identical due to this but they do contain the same securities. Not sure if the added contracts make them “different” enough? My guess is “Yes”. Also, SPXL vs UPRO, SPXL holds IVV and UPRO hold the individual securities. Both use different contracts with different financial institutions. Also guessing that these are different enough to not be “identical”. They are closer to the same than I thought though.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

tomphilly wrote: Fri Jan 21, 2022 3:50 pm At -15.23% HFEA 60/40 is (so far) just shy of the worst monthly drawdown in nearly 13 years, which was Oct 2018 (-16.11%). Thankfully, TMF has come to the rescue the past 2 days.
Sounds about right. I run 50-25-25 of IXUS, UPRO, and TMF in my Roth and it's down less than 9%. My whole portfolio is down like 6%. So, this really is pretty pedestrian so far... not to say it won't get worse, but this isn't even a 'correction' yet for me.
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TheDoctor91
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheDoctor91 »

Wow a lot of the comments earlier this week in this thread are a little alarming. I highly recommend that if you can’t stomach this then to bail now. Remember, intramonth 2008 you probably saw close to an 80% total drawdown with much scarier headlines. People legitimately thought the world of finance was coming to an end. Millions underwater on homes, pension plans way underwater, SPY 50% drawdown etc.

So far, we’re at less than a 10% drawdown in SPY.

People were saying earlier in the week that LTT are done, fed is hawkish, inflation, rates rising, and so on. Yet, TMF up ~3% last 2 days each.

Why don’t these excellent market forecasters run a hedge fund instead? Would seem like a better use of talent.

I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.

Jeez. Get a grip.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DarkMatter731 »

TheDoctor91 wrote: Fri Jan 21, 2022 8:37 pm Wow a lot of the comments earlier this week in this thread are a little alarming. I highly recommend that if you can’t stomach this then to bail now. Remember, intramonth 2008 you probably saw close to an 80% total drawdown with much scarier headlines. People legitimately thought the world of finance was coming to an end. Millions underwater on homes, pension plans way underwater, SPY 50% drawdown etc.

So far, we’re at less than a 10% drawdown in SPY.

People were saying earlier in the week that LTT are done, fed is hawkish, inflation, rates rising, and so on. Yet, TMF up ~3% last 2 days each.

Why don’t these excellent market forecasters run a hedge fund instead? Would seem like a better use of talent.

I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.

Jeez. Get a grip.
I think people overestimate their risk tolerance. It happened during the coronavirus crisis as well where people freak out.

I'm commenting for posterity here but I don't see a crisis looming personally. The fundamentals of the economy are still strong and this drawdown is nowhere significant (leverage is making it seem way more scary than it actually is).

With that said, I'm going to rotate out of equities soon based on my volatility model.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheDoctor91 »

DarkMatter731 wrote: Fri Jan 21, 2022 9:49 pm
TheDoctor91 wrote: Fri Jan 21, 2022 8:37 pm Wow a lot of the comments earlier this week in this thread are a little alarming. I highly recommend that if you can’t stomach this then to bail now. Remember, intramonth 2008 you probably saw close to an 80% total drawdown with much scarier headlines. People legitimately thought the world of finance was coming to an end. Millions underwater on homes, pension plans way underwater, SPY 50% drawdown etc.

So far, we’re at less than a 10% drawdown in SPY.

People were saying earlier in the week that LTT are done, fed is hawkish, inflation, rates rising, and so on. Yet, TMF up ~3% last 2 days each.

Why don’t these excellent market forecasters run a hedge fund instead? Would seem like a better use of talent.

I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.

Jeez. Get a grip.
I think people overestimate their risk tolerance. It happened during the coronavirus crisis as well where people freak out.

I'm commenting for posterity here but I don't see a crisis looming personally. The fundamentals of the economy are still strong and this drawdown is nowhere significant (leverage is making it seem way more scary than it actually is).

With that said, I'm going to rotate out of equities soon based on my volatility model.
I agree with you as well. Any crisis is in people’s heads. Corporations, the consumer, fundamentals, and the economy are very strong. The future looks good to me.

I have a few models may rotate me out EOM as well, let’s see what monday brings.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChinchillaWhiplash »

ChinchillaWhiplash wrote: Fri Jan 21, 2022 9:03 am Don’t know if this has been discussed before but has anyone used their taxable to do mega TLH? I’m buying VOO, QQQ, and a SC index fund. If any of these drop 20% or more I will sell for a loss, claim loss on taxes and buy UPRO, TQQQ, TNA. Seems like a win win. Have your cake and eat it too? Anybody doing this?
Well, after reading this article, seems like this will not hold water and the 30 days need to be used to not trigger a wash sale in the eyes of the IRS. Bummer :oops: One could switch from one index to another though. Not quite a direct TLH, but could work out favorably if they are similar in performance. https://www.morningstar.com/articles/10 ... -identical

SCHA and TNA would make good partners for Small Cap. Would guess that a large cap blend index could be partnered with UPRO. So there is some hope of using this strategy.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by viajero »

You can use total market index etf VTI instead of VOO - it tracks pretty much the same as VOO but has a completely different underlying index which will prevent it from being considered a wash sale. There is also ITOT which also tracks with snp and total market index but is yet another different index and will not cause a wash sale when switched to UPRO.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

I stumbled across a pretty comprehensive summary of HFEA on reddit. It covers TLH using SPXL for UPRO and synthetic long stocks for TMF, with an example of how to calculate the option positions to mimic TMF. To rule out any ambiguity around wash sale rules for UPRO/SPXL you could also use the same synthetic long stock method.
TheDoctor91 wrote: Fri Jan 21, 2022 8:37 pm I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.
You're right - FUD has gripped the market and headlines and there is currently only one perceivable future for many. Declining PPI (link), PBOC cutting rates, VIX inversion (link) are a few indicators that signal other possibilities. The demographic megatrends putting downward pressure on interest rates also didn't suddenly vanish.

The idea that we're "Leaving the era of easy money" by raising rates from 0% to eventually 1% or 2% over several years seems like hyperbole. Will new Tech companies still achieve ridiculous valuations at slightly higher interest rates? Yes.
no simpler
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by no simpler »

It seems like Composer's iteration on this strategy is continuing to do a bit better during the recent volatility:
https://app.composer.trade/symphony/GRJ ... u/details

Image

Interesting post:
https://www.composer.trade/blog/an-online-origin-story

It doesn't seem to get the same raw returns, but drawdowns are a lot more muted:
Image
zeejee
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zeejee »

Hydromod wrote: Fri Jan 21, 2022 11:30 am
zeejee wrote: Fri Jan 21, 2022 10:46 am I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
There was some extensive discussion upthread a while back. The conclusion was high costs would make it unattractive. I seem to remember something about capped upside, but I could be wrong on that.
Thanks for the clues. Went back to study those posts.

Myself has a portion in the OP's original strategy. But one issue keeps puzzling me. This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

zeejee wrote: Sat Jan 22, 2022 10:06 amThanks for the clues. Went back to study those posts.

Myself has a portion in the OP's original strategy. But one issue keeps puzzling me. This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
You can say the same about the Bogleheads 3-fund portfolio. The beauty of HFEA is that there's nothing magical about it. It's hardly a "strategy" - it's basically just a 55/45 portfolio levered up. It generally follows modern portfolio theory.

And I'd challenge that assumption on "conventional wisdom." Again, looking at a standard Bogleheads portfolio - sure, a ton of people are invested in the US stock market, but it still makes money because the underlying businesses (and bonds) it's invested in make money.

The only way something like this can be "overweight" is if the underlying LTTs and S&P500 were overweight, because HFEA is just leverage on those. And FWIW the NYSE has a total market cap of ~$30T. I'd be surprised if total investment in HFEA was more than $100M.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

zeejee wrote: Sat Jan 22, 2022 10:06 am Thanks for the clues. Went back to study those posts.

Myself has a portion in the OP's original strategy. But one issue keeps puzzling me. This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
Well, I do wonder 'who are these people' who are the counterparties to UPRO? What kind of person would do that?

Clearly there'll be a limit to how many of those positions exist at reasonable prices. Somebody out there has whatever billion dollars short position and is willing to change it for their convenience every single day. You could make some argument for being a counterparty to the bonds, but with stocks it just seems unwise.

Owning derivatives is not the same as owning the asset.
This time is the same
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hillclimber
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

firebirdparts wrote: Sat Jan 22, 2022 2:10 pm
zeejee wrote: Sat Jan 22, 2022 10:06 am Thanks for the clues. Went back to study those posts.

Myself has a portion in the OP's original strategy. But one issue keeps puzzling me. This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
Well, I do wonder 'who are these people' who are the counterparties to UPRO? What kind of person would do that?

Clearly there'll be a limit to how many of those positions exist at reasonable prices. Somebody out there has whatever billion dollars short position and is willing to change it for their convenience every single day. You could make some argument for being a counterparty to the bonds, but with stocks it just seems unwise.

Owning derivatives is not the same as owning the asset.
I think the bank offering the swap (or the investor shorting the future) generally owns S&P 500 positions to offset the risk and profits by collecting the implied financing rate. It's like selling covered calls on a stock.
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tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

zeejee wrote: Sat Jan 22, 2022 10:06 am This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
I have noticed this too - it is in a lot of places. There's even an /r/HFEA subreddit. But as DarkMatter731 pointed out earlier, TMF has only $400MM assets under management.
Last edited by tomphilly on Sat Jan 22, 2022 6:03 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

DarkMatter731 wrote: Thu Jan 13, 2022 9:47 pm Any efficient portfolio should have more TYD compared with TMF I'd have thought. Short-term treasuries are a much, much better hedge than long-term treasuries - it's slightly surprising to be honest that everyone has chosen to go with TMF when you can lever up short-term treasuries far more using derivatives to make it comparable to a 45% TMF allocation.
I expect that most people here don't have enough money in order to get short-term treasury exposure via futures.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

firebirdparts wrote: Sat Jan 22, 2022 2:10 pm
zeejee wrote: Sat Jan 22, 2022 10:06 am Thanks for the clues. Went back to study those posts.

Myself has a portion in the OP's original strategy. But one issue keeps puzzling me. This excellent adventure strategy has become quite popular across this forum, Reddit, and everywhere. Many dumped their portfolios into it. Conventional wisdom says a strategy will stop working if everyone practices it. Will HFEA be an exception? Maybe the rising interest rate kills it sooner than the conventional wisdom comes true. Time will tell.
Well, I do wonder 'who are these people' who are the counterparties to UPRO? What kind of person would do that?

Clearly there'll be a limit to how many of those positions exist at reasonable prices. Somebody out there has whatever billion dollars short position and is willing to change it for their convenience every single day. You could make some argument for being a counterparty to the bonds, but with stocks it just seems unwise.

Owning derivatives is not the same as owning the asset.
For the most part, the counterparty is the ETF manager. But they are not selling it to you naked.

Say, they have $100M. They put the $100M down as collateral, and buy $300M worth of futures, roughly.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

DMoogle wrote: Sat Jan 22, 2022 10:35 am I'd be surprised if total investment in HFEA was more than $100M.
Strictly speaking that is not true.

Bridgewater and those that follow Bridgewater have various versions of it.

The building blocks are the same:
- blend Stock vs Treasury in a way that maximizes sharpe, including picking the specific part of the treasury curve that is the juicies,
- leverage to 150%, 200%, etc.

Leverage is achieved using futures.

UPRO and TMF are rebalancing daily, taking some of the trade management burden OFF the investors.

Professionals doing that type of leveraged trades may or may not rebal daily, but will definitely rebal frequently to keep their exposure, relative to invested capital.

Several top asset management firms (in addition to Bridgewater) are running variations of this: JP Morgan, Goldman, in their "alternative" funds.

They may even have fancier versions, where they use options to lever, combination of buying and selling.

Note that levered stocks or levered treasuries do not give you additional exposure factors (or risk premia). Using options will give you access to other risk premia.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

hillclimber wrote: Sat Jan 22, 2022 3:48 pm

I think the bank offering the swap (or the investor shorting the future) generally owns S&P 500 positions to offset the risk and profits by collecting the implied financing rate. It's like selling covered calls on a stock.
Please note that fundamentally, NO trading participant has to be short in order to provide liquidity to the other side who is long HFEA.

The reason is that the total US stock market cap is like $30T and total supply of treasuries is like $20T.

You can think of the ENTIRE supply of US Stock Market + Treasuries as available for liquidty.
There are a few special things about HFEA:
- leverage (100%, 200%, whatever),
- the proportion (ex: 55/45)
- the rebalance aspect.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

zeejee wrote: Fri Jan 21, 2022 10:46 am I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
If I were to guess, it costs 4% a year to short SPXU and TMV.
So, that 4% a year cost is NOT shown in your PV chart.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

no simpler wrote: Sat Jan 22, 2022 8:31 am It seems like Composer's iteration on this strategy is continuing to do a bit better during the recent volatility:
https://app.composer.trade/symphony/GRJ ... u/details

Image

Interesting post:
https://www.composer.trade/blog/an-online-origin-story

It doesn't seem to get the same raw returns, but drawdowns are a lot more muted:
This is a great website, thank you for sharing.

I have a couple of questions for you:
(1) how did you get that comparison: HFEAR to the other ones (HFEA and SPY), i.e., this image: https://i.imgur.com/5KxzAv7.png
(2) you said, "it doesn't seem to get the same raw returns", but drawdowns are a lot more muted.

What do you mean, "same raw returns"?

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

Post by Semantics »

AlphaLess wrote: Sat Jan 22, 2022 6:23 pm
zeejee wrote: Fri Jan 21, 2022 10:46 am I have been following this fantastic thread for a while. Thank you all for your significant contribution and thorough discussions about the strategy. Not sure if anyone talked about implementing by shorting -3x ETF pair 55/45 SPXU/TMV. I think managing these inverse ETFs has big rebalancing losses and high commissions. So shorting them turns these losses into additional returns. The back test on PV shows a higher CAGR and better Sharpe ratio, compared to OP's 55/45 UPRO/TMF.

2010-2022
CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
55/45 UPRO/TMF 35.36% 22.44% 73.88% -14.16% -19.52% 1.45 2.85
-55/-45 SPXU/TMV 39.58% 20.65% 93.78% -12.26% -21.77% 1.71 3.58

Curious if anyone here uses this shorting strategy? Besides that it may be difficult to borrow SPXU and TMV, are there any other risks preventing us from being a little greedier? Thanks.

https://www.portfoliovisualizer.com/bac ... ion4_2=-45
If I were to guess, it costs 4% a year to short SPXU and TMV.
So, that 4% a year cost is NOT shown in your PV chart.
In addition, this month is a perfect case in point of how the shorting strategy is riskier, even if borrowing costs were zero, because it pulls your leverage above 3x in a drawdown.

Short SQQQ: -45% this month, you'd be at about 4.37x leverage on the equities portion if no intra-month rebalancing
Long TQQQ: -34% this month, you're always at 3x leverage

In a prolonged decline the short position can easily blow up your account because it compounds against you. Your exposure to the market just keeps going up and up and up until you rebalance.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

AlphaLess wrote: Sat Jan 22, 2022 6:18 pm Please note that fundamentally, NO trading participant has to be short in order to provide liquidity to the other side who is long HFEA.
Swaps and futures are types of contracts. One party makes money if the underlying goes up, the "long" side. The other party makes money if the underlying goes down, the "short" side. If you look at the UPRO daily holdings, it makes use of total return swaps from banks like Citibank and JP Morgan. It also uses futures to gain exposure.

If you buy UPRO, you are on the long side while the bank, through the total return swap, is on the short side.

You could implement HFEA using margin, but I was talking about how Citibank and JPM probably hedge their short exposure.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by thenextguy »

TheDoctor91 wrote: Fri Jan 21, 2022 8:37 pm Wow a lot of the comments earlier this week in this thread are a little alarming. I highly recommend that if you can’t stomach this then to bail now. Remember, intramonth 2008 you probably saw close to an 80% total drawdown with much scarier headlines. People legitimately thought the world of finance was coming to an end. Millions underwater on homes, pension plans way underwater, SPY 50% drawdown etc.

So far, we’re at less than a 10% drawdown in SPY.

People were saying earlier in the week that LTT are done, fed is hawkish, inflation, rates rising, and so on. Yet, TMF up ~3% last 2 days each.

Why don’t these excellent market forecasters run a hedge fund instead? Would seem like a better use of talent.

I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.

Jeez. Get a grip.
I don't have the numbers, but during the 2008 crises long term treasuries were booming. So I doubt this strategy was ever down 80% in 2008.

So far YTD you've got UPRO (-22%) and TMF (-9.1%) tanking at the same time. I don't think this drawdown is as insignificant as you indicate.

Obviously this is the kind of volatility that people signed up for when they decided to try this strategy, but I'm not at all surprised it has shaken some people.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DarkMatter731 »

thenextguy wrote: Sat Jan 22, 2022 8:28 pm
TheDoctor91 wrote: Fri Jan 21, 2022 8:37 pm Wow a lot of the comments earlier this week in this thread are a little alarming. I highly recommend that if you can’t stomach this then to bail now. Remember, intramonth 2008 you probably saw close to an 80% total drawdown with much scarier headlines. People legitimately thought the world of finance was coming to an end. Millions underwater on homes, pension plans way underwater, SPY 50% drawdown etc.

So far, we’re at less than a 10% drawdown in SPY.

People were saying earlier in the week that LTT are done, fed is hawkish, inflation, rates rising, and so on. Yet, TMF up ~3% last 2 days each.

Why don’t these excellent market forecasters run a hedge fund instead? Would seem like a better use of talent.

I like how it’s accepted that we don’t know the future, but when it comes to rising rates people are much better at predicting and forecasting and building that in to their models than trillions of dollars of pensions and sovereign wealth funds.

Jeez. Get a grip.
I don't have the numbers, but during the 2008 crises long term treasuries were booming. So I doubt this strategy was ever down 80% in 2008.

So far YTD you've got UPRO (-22%) and TMF (-9.1%) tanking at the same time. I don't think this drawdown is as insignificant as you indicate.

Obviously this is the kind of volatility that people signed up for when they decided to try this strategy, but I'm not at all surprised it has shaken some people.
Nobody should be risking more than they can afford to lose.

I'm using a lot more leverage than 3x and running my own algo but I'm comfortable losing what I've got invested (which is not all of my portfolio).

I'm young, working in finance, and have a high income so I've got 40 years to earn money I lose.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

thenextguy wrote: Sat Jan 22, 2022 8:28 pm I don't have the numbers, but during the 2008 crises long term treasuries were booming. So I doubt this strategy was ever down 80% in 2008.

So far YTD you've got UPRO (-22%) and TMF (-9.1%) tanking at the same time. I don't think this drawdown is as insignificant as you indicate.

Obviously this is the kind of volatility that people signed up for when they decided to try this strategy, but I'm not at all surprised it has shaken some people.
And that's UPRO. For the members here who are running TQQQ (-34%) and TMF (-9.1%), it's definitely a violent start.

I suspect those running UPRO/TMF are chilling; while those running TQQQ/TMF are doing less well. Particularly when you look at the blue line here...

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

Post by AlphaLess »

hillclimber wrote: Sat Jan 22, 2022 8:26 pm
AlphaLess wrote: Sat Jan 22, 2022 6:18 pm Please note that fundamentally, NO trading participant has to be short in order to provide liquidity to the other side who is long HFEA.
Swaps and futures are types of contracts. One party makes money if the underlying goes up, the "long" side. The other party makes money if the underlying goes down, the "short" side. If you look at the UPRO daily holdings, it makes use of total return swaps from banks like Citibank and JP Morgan. It also uses futures to gain exposure.

If you buy UPRO, you are on the long side while the bank, through the total return swap, is on the short side.

You could implement HFEA using margin, but I was talking about how Citibank and JPM probably hedge their short exposure.
Yes, I understand swaps, futures, and forwards very well.

However, the bank on the other side of that future, swap, etc, is not naked short.

They have also hedged their exposure by buying the underlying stocks, or something equivalent.
I don't carry a signature because people are easily offended.
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hillclimber
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

AlphaLess wrote: Sat Jan 22, 2022 11:35 pm However, the bank on the other side of that future, swap, etc, is not naked short.
They have also hedged their exposure by buying the underlying stocks, or something equivalent.
That's literally what I was saying. Banks hedge their swaps with long positions. Were you meaning to reply to firebirdparts?
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

AlphaLess wrote: Sat Jan 22, 2022 6:14 pm
DMoogle wrote: Sat Jan 22, 2022 10:35 am I'd be surprised if total investment in HFEA was more than $100M.
Strictly speaking that is not true.

Bridgewater and those that follow Bridgewater have various versions of it.

The building blocks are the same:
- blend Stock vs Treasury in a way that maximizes sharpe, including picking the specific part of the treasury curve that is the juicies,
- leverage to 150%, 200%, etc.

Leverage is achieved using futures.

UPRO and TMF are rebalancing daily, taking some of the trade management burden OFF the investors.

Professionals doing that type of leveraged trades may or may not rebal daily, but will definitely rebal frequently to keep their exposure, relative to invested capital.

Several top asset management firms (in addition to Bridgewater) are running variations of this: JP Morgan, Goldman, in their "alternative" funds.

They may even have fancier versions, where they use options to lever, combination of buying and selling.

Note that levered stocks or levered treasuries do not give you additional exposure factors (or risk premia). Using options will give you access to other risk premia.
Do you have fund names of Bridgewater, or JP Morgan or Goldmand, by any chance? I was not able to find those funds googling.
no simpler
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by no simpler »

AlphaLess wrote: Sat Jan 22, 2022 6:35 pm
no simpler wrote: Sat Jan 22, 2022 8:31 am It seems like Composer's iteration on this strategy is continuing to do a bit better during the recent volatility:
https://app.composer.trade/symphony/GRJ ... u/details

Image

Interesting post:
https://www.composer.trade/blog/an-online-origin-story

It doesn't seem to get the same raw returns, but drawdowns are a lot more muted:
This is a great website, thank you for sharing.

I have a couple of questions for you:
(1) how did you get that comparison: HFEAR to the other ones (HFEA and SPY), i.e., this image: https://i.imgur.com/5KxzAv7.png
(2) you said, "it doesn't seem to get the same raw returns", but drawdowns are a lot more muted.

What do you mean, "same raw returns"?

TY
1. You have to go into the more advanced backtest section by clicking the "edit a copy button". It's a bit hidden. See below:
Image

2. I just meant the annualized returns. The original strategy has larger annualized returns, albeit larger drawdowns.
AlphaLess
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

comeinvest wrote: Sun Jan 23, 2022 4:40 am
AlphaLess wrote: Sat Jan 22, 2022 6:14 pm
DMoogle wrote: Sat Jan 22, 2022 10:35 am I'd be surprised if total investment in HFEA was more than $100M.
Strictly speaking that is not true.

Bridgewater and those that follow Bridgewater have various versions of it.

The building blocks are the same:
- blend Stock vs Treasury in a way that maximizes sharpe, including picking the specific part of the treasury curve that is the juicies,
- leverage to 150%, 200%, etc.

Leverage is achieved using futures.

UPRO and TMF are rebalancing daily, taking some of the trade management burden OFF the investors.

Professionals doing that type of leveraged trades may or may not rebal daily, but will definitely rebal frequently to keep their exposure, relative to invested capital.

Several top asset management firms (in addition to Bridgewater) are running variations of this: JP Morgan, Goldman, in their "alternative" funds.

They may even have fancier versions, where they use options to lever, combination of buying and selling.

Note that levered stocks or levered treasuries do not give you additional exposure factors (or risk premia). Using options will give you access to other risk premia.
Do you have fund names of Bridgewater, or JP Morgan or Goldmand, by any chance? I was not able to find those funds googling.
I can find out. However, I caution you that they are not selling a fund called: "Risk Parity" or something like that. Instead, it would be part of one of their funds.

I think I can find out the Goldman and Bridgewater. Stay put.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlphaLess »

hillclimber wrote: Sun Jan 23, 2022 12:31 am
AlphaLess wrote: Sat Jan 22, 2022 11:35 pm However, the bank on the other side of that future, swap, etc, is not naked short.
They have also hedged their exposure by buying the underlying stocks, or something equivalent.
That's literally what I was saying. Banks hedge their swaps with long positions. Were you meaning to reply to firebirdparts?
Apologies. As long as we are on the same page.

Good to clear up the confusion.

Thanks.
I don't carry a signature because people are easily offended.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

AlphaLess wrote: Sun Jan 23, 2022 2:49 pm
comeinvest wrote: Sun Jan 23, 2022 4:40 am
AlphaLess wrote: Sat Jan 22, 2022 6:14 pm
DMoogle wrote: Sat Jan 22, 2022 10:35 am I'd be surprised if total investment in HFEA was more than $100M.
Strictly speaking that is not true.

Bridgewater and those that follow Bridgewater have various versions of it.

The building blocks are the same:
- blend Stock vs Treasury in a way that maximizes sharpe, including picking the specific part of the treasury curve that is the juicies,
- leverage to 150%, 200%, etc.

Leverage is achieved using futures.

UPRO and TMF are rebalancing daily, taking some of the trade management burden OFF the investors.

Professionals doing that type of leveraged trades may or may not rebal daily, but will definitely rebal frequently to keep their exposure, relative to invested capital.

Several top asset management firms (in addition to Bridgewater) are running variations of this: JP Morgan, Goldman, in their "alternative" funds.

They may even have fancier versions, where they use options to lever, combination of buying and selling.

Note that levered stocks or levered treasuries do not give you additional exposure factors (or risk premia). Using options will give you access to other risk premia.
Do you have fund names of Bridgewater, or JP Morgan or Goldmand, by any chance? I was not able to find those funds googling.
I can find out. However, I caution you that they are not selling a fund called: "Risk Parity" or something like that. Instead, it would be part of one of their funds.

I think I can find out the Goldman and Bridgewater. Stay put.
Thanks. I can't find any fund on the Bridgewater site.
ninvester12349
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ninvester12349 »

I understand a lot of people use Roth IRAs to minimize tax from rebalancing. However, I'm penalized from taking money out of the account until 59.5 years of age. As a 20 year old, this is quite a long time horizon, so while I plan to invest for 10-15 years at least, I'm wary of leaving it in there for 40 years.

Does anyone have numbers on how much worse off HFEA is in a taxable account?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

ninvester12349 wrote: Sun Jan 23, 2022 5:42 pm I understand a lot of people use Roth IRAs to minimize tax from rebalancing. However, I'm penalized from taking money out of the account until 59.5 years of age. As a 20 year old, this is quite a long time horizon, so while I plan to invest for 10-15 years at least, I'm wary of leaving it in there for 40 years.

Does anyone have numbers on how much worse off HFEA is in a taxable account?
About 2-3% tax drag if I recall correctly.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Afrofreak wrote: Sun Jan 23, 2022 6:27 pm
ninvester12349 wrote: Sun Jan 23, 2022 5:42 pm I understand a lot of people use Roth IRAs to minimize tax from rebalancing. However, I'm penalized from taking money out of the account until 59.5 years of age. As a 20 year old, this is quite a long time horizon, so while I plan to invest for 10-15 years at least, I'm wary of leaving it in there for 40 years.

Does anyone have numbers on how much worse off HFEA is in a taxable account?
About 2-3% tax drag if I recall correctly.
I estimated the equivalent of 1 to 2% ER from 1986 on federal taxes, assuming a 15% LTCG tax bracket and M1's strategy for selling shares (preferentially ST loss, LT loss, LT gain, ST gain). I forget the assumed tax bracket for STCG. No state taxes considered. This percentage bounced around from year to year quite a bit though. Others have come up with something similar.
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hillclimber
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

AlphaLess wrote: Sun Jan 23, 2022 2:50 pm
hillclimber wrote: Sun Jan 23, 2022 12:31 am
AlphaLess wrote: Sat Jan 22, 2022 11:35 pm However, the bank on the other side of that future, swap, etc, is not naked short.
They have also hedged their exposure by buying the underlying stocks, or something equivalent.
That's literally what I was saying. Banks hedge their swaps with long positions. Were you meaning to reply to firebirdparts?
Apologies. As long as we are on the same page.

Good to clear up the confusion.

Thanks.
Yeah, no worries, I was a little confused, haha.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Sun Jan 23, 2022 6:33 pm
Afrofreak wrote: Sun Jan 23, 2022 6:27 pm
ninvester12349 wrote: Sun Jan 23, 2022 5:42 pm I understand a lot of people use Roth IRAs to minimize tax from rebalancing. However, I'm penalized from taking money out of the account until 59.5 years of age. As a 20 year old, this is quite a long time horizon, so while I plan to invest for 10-15 years at least, I'm wary of leaving it in there for 40 years.

Does anyone have numbers on how much worse off HFEA is in a taxable account?
About 2-3% tax drag if I recall correctly.
I estimated the equivalent of 1 to 2% ER from 1986 on federal taxes, assuming a 15% LTCG tax bracket and M1's strategy for selling shares (preferentially ST loss, LT loss, LT gain, ST gain). I forget the assumed tax bracket for STCG. No state taxes considered. This percentage bounced around from year to year quite a bit though. Others have come up with something similar.
How can we avoid the tax drag?
What if I don't rebalance in taxable when it would result in taxable gains?
I understand the portfolio will temporarily deviate from the target allocation, but let's say I implement HFEA with treasury futures, box spreads, and equity index ETFs (probably the most efficient implementation in taxable), and do all the regular rebalancing except from equities.
Short version of proposed strategy:
Two scenarios: 1. Equities crashed -> I sell treasury futures, buy equities; 2. treasuries crashed -> buy new treasury futures. Wait until the equities portion of the portfolio self-corrects.
Have we tested something like that somewhere in this thread?
corpgator
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by corpgator »

ninvester12349 wrote: Sun Jan 23, 2022 5:42 pm I understand a lot of people use Roth IRAs to minimize tax from rebalancing. However, I'm penalized from taking money out of the account until 59.5 years of age. As a 20 year old, this is quite a long time horizon, so while I plan to invest for 10-15 years at least, I'm wary of leaving it in there for 40 years.

Does anyone have numbers on how much worse off HFEA is in a taxable account?
You can remove your principal at any time penalty free. Just leave the gains.
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

comeinvest wrote: Mon Jan 24, 2022 3:08 am How can we avoid the tax drag?
What if I don't rebalance in taxable when it would result in taxable gains?
I understand the portfolio will temporarily deviate from the target allocation, but let's say I implement HFEA with treasury futures, box spreads, and equity index ETFs (probably the most efficient implementation in taxable), and do all the regular rebalancing except from equities.
Short version of proposed strategy:
Two scenarios: 1. Equities crashed -> I sell treasury futures, buy equities; 2. treasuries crashed -> buy new treasury futures. Wait until the equities portion of the portfolio self-corrects.
Have we tested something like that somewhere in this thread?
I don't remember seeing a whole lot of analysis on tax implications. I'm almost certain nothing with futures.

I'd be a bit careful about timing rebalancing around tax gains. Presumably the equity positions are going to usually outgain the treasury positions, so rebalancing is usually from equities. In backtesting with the 40/60 flavor of HFEA, the median duration before rebalancing was roughly 105/180/250 days for 10/15/20% bands. It can be years between crashes. So the portfolio can get really equity-rich between crashes without regular rebalancing, leaving more exposed and less for crash protection.

Of course, tax mitigation is important. But if taxes take the equivalent of 1 - 3% ER on a strategy that returns >20% CAGR, you should also consider how much you want to distort the crash protection required to get the >20% CAGR?
BayStater
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BayStater »

A little over 1 year invested in HFEA now. ~10% of my net worth. I've also contributed ~10% of my annual contributions.

At the peak, I had been up about 1500 bps over SPY. Now about breakeven. Unfortunately, it's a brutal day today for UPRO and not getting much help from TMF.
hameshatumkochaha
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hameshatumkochaha »

Hi,
This is a great place to get HFEA updates. There seems to be one on Reddit as well. I just learned about the composer's refinement.
Questions:
1. While we have two threads on HFEA (Part 1 and 2), is there somewhere that lists the refinements made? I saw the composer's, I see a few posts earlier an idea to short the inverse 3x ETFs etc. If someone has compiled a list and is tracking, please post.
2. HFEA is certainly quite interesting as many of us are following it, investing in it, plan to invest in it. I wonder if there are some other good ideas (many exist that follow the backtesting but not as interesting) that are listed somewhere. I stumbled on the HFEA a month ago and almost missed reading it... If there are some other interesting ideas, I would like to know.
I know both are a little wide nets but I guess I am not the only one thinking / thought about these questions...
Thanks!
taojaxx
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

So UPRO down 9+% TMF up 0.25% at pixel time. Time for resolve.
Better lucky than smart.
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