HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by viajero »

Thanks everyone for your input. You are correct, I'm completely new to HFEA (though not new to investing) and still trying to get a hang of it.

One thing I want to throw out here to see if you tear it to pieces - CWEB. It's a 3x leveraged china internet etf KWEB. Yes, China is ears deep in FUD zone, regulatory uncertainty, threat of delisting etc. But if (when?) this FUD eventually goes away, CWEB has 10x potential, if you look at the chart - it's sitting at $11 with 52 week high being $116.

So, I just added it as 5% of my allocation, as I'm willing to take 5% portfolio downside risk for a potential total portfolio 50% upside, and my new target allocation is:

UPRO/TQQQ/CWEB/TMF 45/10/5/40
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Afrofreak wrote: Wed Jan 05, 2022 10:09 am
Hydromod wrote: Wed Jan 05, 2022 8:37 am
Afrofreak wrote: Wed Jan 05, 2022 12:22 am Alright then, by your logic we should all be rebalancing every 2 weeks. Heck, why stop there, let's rebalance every day! That way we will always be at target allocation and can reduce volatility as much as possible. I know I'm playing devil's advocate here but this is ridiculous... Where is the consistency? We have long accepted quarterly rebalancing to be the most optimal, this is not even debatable and yet here we are discussing the merits of what essentially is bi-weekly rebalancing. If in true HFEA fashion you make no additional contributions and rebalance quarterly then that must also be followed when making additional contributions, and the only way to do that correctly is to allocate the new money in accordance with the current ratio of your portfolio.
That's all well and good but even if trading slippage didn't exist and we looked at this in a vacuum, OP was essentially asking whether bi-weekly or quarterly rebalancing is recommended. Nowhere did they mention anything about rebalancing on the daily.
That's why I was replying to the person making the comment about rebalancing on the daily. :beer
cardioverter
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cardioverter »

viajero wrote: Wed Jan 05, 2022 10:36 am Thanks everyone for your input. You are correct, I'm completely new to HFEA (though not new to investing) and still trying to get a hang of it.

One thing I want to throw out here to see if you tear it to pieces - CWEB. It's a 3x leveraged china internet etf KWEB. Yes, China is ears deep in FUD zone, regulatory uncertainty, threat of delisting etc. But if (when?) this FUD eventually goes away, CWEB has 10x potential, if you look at the chart - it's sitting at $11 with 52 week high being $116.

So, I just added it as 5% of my allocation, as I'm willing to take 5% portfolio downside risk for a potential total portfolio 50% upside, and my new target allocation is:

UPRO/TQQQ/CWEB/TMF 45/10/5/40
CWEB is 2x, and it's only IT-based. If you really want to go Vegas gambling, you actually want YINN, which is 3x and more broad-based (although not really based on sector weighting % from Direxion). If you plot CWEB and YINN over the life of the funds, you'll see that just like Vegas gambling, you'll eventually lose your money to the House.

Edit: Re-reading it again, you probably meant KWEB as you typed both... but basically it's the same.
viajero
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by viajero »

cardioverter wrote: Wed Jan 05, 2022 11:23 am
viajero wrote: Wed Jan 05, 2022 10:36 am Thanks everyone for your input. You are correct, I'm completely new to HFEA (though not new to investing) and still trying to get a hang of it.

One thing I want to throw out here to see if you tear it to pieces - CWEB. It's a 3x leveraged china internet etf KWEB. Yes, China is ears deep in FUD zone, regulatory uncertainty, threat of delisting etc. But if (when?) this FUD eventually goes away, CWEB has 10x potential, if you look at the chart - it's sitting at $11 with 52 week high being $116.

So, I just added it as 5% of my allocation, as I'm willing to take 5% portfolio downside risk for a potential total portfolio 50% upside, and my new target allocation is:

UPRO/TQQQ/CWEB/TMF 45/10/5/40
CWEB is 2x, and it's only IT-based. If you really want to go Vegas gambling, you actually want YINN, which is 3x and more broad-based (although not really based on sector weighting % from Direxion). If you plot CWEB and YINN over the life of the funds, you'll see that just like Vegas gambling, you'll eventually lose your money to the House.
I'm quite familiar with China's internet stocks, so CWEB is a better one for me than YINN which is a complete black box where I have no idea about most companies, that's why I'd rather get 5% on the risky stuff I know 🙂 Also, I've invested just 10k into HFEA lottery ticket, so I'm ok with $500 of that going to the toilet in the worst case scenario. I'm planning to re-access that allocation on every rebalancing (quarterly) and might get rid of it completely if I feel that the China risk has increased.
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cflannagan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

Afrofreak wrote: Wed Jan 05, 2022 10:18 am
cflannagan wrote: Wed Jan 05, 2022 8:21 am
AlinMC wrote: Wed Jan 05, 2022 5:19 am
60/40 in order to maintain the current ratio. This maximizes performance according to backtests, ensuring rebalance only occurs quarterly.
I'm not aware of any such backtests, can you point me out to those so I can see for myself? Yes, quarterly rebalancing frequency have been backtested, I'm referring to the part where you say it've been backtested to show it's better to make new contributions at current allocations (60/40 for example) than to add money into underperforming asset to bring it back to the target allocation, then add the rest of the new money according to target %'s.
If done correctly, making new contributions to the portfolio makes no difference in the performance (in terms of %) of it, so you can simply backtest as if you had not made any contributions at all. That's kind of the point.

Suppose you have a portfolio that starts at 55/45 UPRO/TMF and by mid-quarter has drifted to 60/40 and you make a contribution. If you split the new money up 60/40, identical to your current allocation, then by default your TWRR but not your MWRR will be the same whether you made that contribution or not. You can test this out by going on PV, set rebalancing to quarterly and check the CAGR. Then, add monthly contributions still with quarterly rebalancing and check again. The CAGR is now the sum of the returns of the portfolio plus contributions but the TWRR will be identical to original CAGR. The only way this is possible is if you contribute at current allocations. If, however, you buy the depreciated asset (in this case TMF) such that your allocation goes back to 55/45, then you have just completed a rebalance halfway through the quarter and that will change both your TWRR and MWRR to the downside according to backtests. This is why it's necessary to contribute at current allocation, so you're not unintentionally rebalancing your portfolio halfway through the quarter.
Okay, yeah I see what you mean. Good to know going forward. Anytime I've been adding new money, I've only been doing those very close to rebalancing dates (like within few trading days), so any thing I "lose" by going with target allocation instead of current allocation if I added new money a few trading days before rebalancing dates should be minimal.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

Not sure why the discussion on rebalancing seems so heated. Worth noting that, as far as the leverage ratio goes, remember that UPRO and TMF are automatically daily rebalanced anyway. When UPRO is crashing, it's buying more of the underlying on a daily basis anyway.

If someone has an income stream that allows for biweekly contributions, it's probably not really going to hurt if those deposits are geared toward rebalancing. If the decision is between wait until the end of the quarter or contribute every two weeks, I'd choose every two weeks.
viajero wrote: Wed Jan 05, 2022 10:36 am Thanks everyone for your input. You are correct, I'm completely new to HFEA (though not new to investing) and still trying to get a hang of it.

One thing I want to throw out here to see if you tear it to pieces - CWEB. It's a 3x leveraged china internet etf KWEB. Yes, China is ears deep in FUD zone, regulatory uncertainty, threat of delisting etc. But if (when?) this FUD eventually goes away, CWEB has 10x potential, if you look at the chart - it's sitting at $11 with 52 week high being $116.

So, I just added it as 5% of my allocation, as I'm willing to take 5% portfolio downside risk for a potential total portfolio 50% upside, and my new target allocation is:

UPRO/TQQQ/CWEB/TMF 45/10/5/40
I don't think you'll find a single reputable person here that would recommend it. Few points off the top of my head:
  • Direxion isn't as good as accomplishing their goal of 2x/3x the target index as Proshares is.
  • CWEB is 2x, not 3x.
  • Looking at a 52-week high to determine what an "upside" is is terrible logic.
  • Expense ratio is 1.32%. Again, for 2x instead of 3x.
Overall, yes, 5% of a portfolio isn't a huge amount so it's not a disaster if it underperforms, but... yeah, using leverage is all about properly balancing a risk:reward ratio, and I don't think having Chinese tech tilt is doing much for that. UPRO has diversification enough.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

DMoogle wrote: Wed Jan 05, 2022 11:57 am If someone has an income stream that allows for biweekly contributions, it's probably not really going to hurt if those deposits are geared toward rebalancing.
But... it is though? The backtests show it. Rebalancing quarterly is superior to rebalancing monthly by a margin of over 3% per year. And even if the margin were minuscule, there is a dichotomy to have one rule for no contributions (only rebalance quarterly) but then another when you make regular contributions (contribute to the depreciated asset, i.e. rebalance bi-weekly). That's terrible logic.
DMoogle wrote: Wed Jan 05, 2022 11:57 am If the decision is between wait until the end of the quarter or contribute every two weeks, I'd choose every two weeks.
Yes, I don't think anyone would dispute that. The entire point of the discussion was how to best contribute throughout a quarter so you don't have to wait till you rebalance.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

Afrofreak wrote: Wed Jan 05, 2022 12:07 pm
DMoogle wrote: Wed Jan 05, 2022 11:57 am If someone has an income stream that allows for biweekly contributions, it's probably not really going to hurt if those deposits are geared toward rebalancing.
But... it is though? The backtests show it. Rebalancing quarterly is superior to rebalancing monthly by a margin of over 3% per year. And even if the margin were minuscule, there is a dichotomy to have one rule for no contributions (only rebalance quarterly) but then another when you make regular contributions (contribute to the depreciated asset, i.e. rebalance bi-weekly). That's terrible logic.
Hmmm, fair enough, I didn't realize the difference has been so large. That's pretty surprising. I wonder what the confidence intervals are on that? Or rather, how statistically significant the backtested data is on that difference. Plus, that margin of difference should at least partially be made up for in risk mitigation. In other words, lower return, but lower risk.

That said, if the starting sum is large enough, the bi-weekly contributions still shouldn't matter that much. So like if there's $100k to start and the contribution is $500/biweekly... it's probably not going to make that big of a difference.
viajero
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by viajero »

DMoogle wrote: Wed Jan 05, 2022 11:57 am Not sure why the discussion on rebalancing seems so heated. Worth noting that, as far as the leverage ratio goes, remember that UPRO and TMF are automatically daily rebalanced anyway. When UPRO is crashing, it's buying more of the underlying on a daily basis anyway.

If someone has an income stream that allows for biweekly contributions, it's probably not really going to hurt if those deposits are geared toward rebalancing. If the decision is between wait until the end of the quarter or contribute every two weeks, I'd choose every two weeks.
viajero wrote: Wed Jan 05, 2022 10:36 am Thanks everyone for your input. You are correct, I'm completely new to HFEA (though not new to investing) and still trying to get a hang of it.

One thing I want to throw out here to see if you tear it to pieces - CWEB. It's a 3x leveraged china internet etf KWEB. Yes, China is ears deep in FUD zone, regulatory uncertainty, threat of delisting etc. But if (when?) this FUD eventually goes away, CWEB has 10x potential, if you look at the chart - it's sitting at $11 with 52 week high being $116.

So, I just added it as 5% of my allocation, as I'm willing to take 5% portfolio downside risk for a potential total portfolio 50% upside, and my new target allocation is:

UPRO/TQQQ/CWEB/TMF 45/10/5/40
I don't think you'll find a single reputable person here that would recommend it. Few points off the top of my head:
  • Direxion isn't as good as accomplishing their goal of 2x/3x the target index as Proshares is.
  • CWEB is 2x, not 3x.
  • Looking at a 52-week high to determine what an "upside" is is terrible logic.
  • Expense ratio is 1.32%. Again, for 2x instead of 3x.
Overall, yes, 5% of a portfolio isn't a huge amount so it's not a disaster if it underperforms, but... yeah, using leverage is all about properly balancing a risk:reward ratio, and I don't think having Chinese tech tilt is doing much for that. UPRO has diversification enough.
Agreed with most of your points. The one about 52 week high though - I meant that when/if China market FUD settles down, that market has a potential of going back to where it was when the FUD started.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

viajero wrote: Wed Jan 05, 2022 12:25 pm
Agreed with most of your points. The one about 52 week high though - I meant that when/if China market FUD settles down, that market has a potential of going back to where it was when the FUD started.
The problem is that one doesn't know when that will be. We cant comment on that due to forum policy but obviously the market had spoken. Also, with more components, you'll start to see that method of rebalancing affecting the performance even more significant than just the 2 components strategy. Unless you have quite a bit of conviction on Chinese internet, i don't see adding provides much value to you.
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

I have a $250k roth, and $18k HSA. I'm thinking about going 55 UPRO / 45 TMF in the roth, and 55 TQQQ / 45 TMF in the HSA. Is there a better allocation to use when using TQQQ/TMF though? Initially I was thinking about going with a 3-way allocation but realized this will be simpler for manually rebalancing.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

Afrofreak wrote: Wed Jan 05, 2022 10:18 am
cflannagan wrote: Wed Jan 05, 2022 8:21 am
AlinMC wrote: Wed Jan 05, 2022 5:19 am
60/40 in order to maintain the current ratio. This maximizes performance according to backtests, ensuring rebalance only occurs quarterly.
I'm not aware of any such backtests, can you point me out to those so I can see for myself? Yes, quarterly rebalancing frequency have been backtested, I'm referring to the part where you say it've been backtested to show it's better to make new contributions at current allocations (60/40 for example) than to add money into underperforming asset to bring it back to the target allocation, then add the rest of the new money according to target %'s.
If done correctly, making new contributions to the portfolio makes no difference in the performance (in terms of %) of it, so you can simply backtest as if you had not made any contributions at all. That's kind of the point.

Suppose you have a portfolio that starts at 55/45 UPRO/TMF and by mid-quarter has drifted to 60/40 and you make a contribution. If you split the new money up 60/40, identical to your current allocation, then by default your TWRR but not your MWRR will be the same whether you made that contribution or not. You can test this out by going on PV, set rebalancing to quarterly and check the CAGR. Then, add monthly contributions still with quarterly rebalancing and check again. The CAGR is now the sum of the returns of the portfolio plus contributions but the TWRR will be identical to original CAGR. The only way this is possible is if you contribute at current allocations. If, however, you buy the depreciated asset (in this case TMF) such that your allocation goes back to 55/45, then you have just completed a rebalance halfway through the quarter and that will change both your TWRR and MWRR to the downside according to backtests. This is why it's necessary to contribute at current allocation, so you're not unintentionally rebalancing your portfolio halfway through the quarter.
I see a few different ways to look at new contributions

1. Allocating it at 55/45 means you're looking at new contributions as starting a 55/45 new position
2. Allocating it to the lower % of your existing position means you're closing out your old position "farther from 55/45" position and starting a new "closer to 55/45" position
3. Allocating it at 60/40 means you're starting a new position at 60/40, to be rebalanced later at 55/45

To me, I can understand the thought process behind #1 and #2, but #3 doesn't seem to make a lot of sense to me. You wouldn't look back at the current HFEA performance since the last quarterly rebalance date and open a new position at the drifted percentage so why would you do that with new contributions?
texasfight
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by texasfight »

What drawdown is this strategy at right now from recent meltup highs?
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hiddenpower wrote: Wed Jan 05, 2022 1:01 pm I have a $250k roth, and $18k HSA. I'm thinking about going 55 UPRO / 45 TMF in the roth, and 55 TQQQ / 45 TMF in the HSA. Is there a better allocation to use when using TQQQ/TMF though? Initially I was thinking about going with a 3-way allocation but realized this will be simpler for manually rebalancing.
The risk parity for SPY/TLT is around 48/52 since TLT's inception in 2002 whereas for QQQ/TLT it is closer to 43/57. Based on that logic, you should allocate slightly more to TMF in the HSA than in the Roth.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

adamhg wrote: Wed Jan 05, 2022 1:24 pm To me, I can understand the thought process behind #1 and #2, but #3 doesn't seem to make a lot of sense to me. You wouldn't look back at the current HFEA performance since the last quarterly rebalance date and open a new position at the drifted percentage so why would you do that with new contributions?
Maybe you should though. I mean, you raise an interesting point in that unless you start HFEA on a quarterly rebalance date, your first quarter is not going to be reflective of HFEA performance overall because those in it have already seen their portfolios drift. Admittedly, that is a rather trivial matter since you will only be off for one quarter at most but if you wanted to be as precise as possible, absolutely you should be calculating how much HFEA has drifted since the last quarter and then contribute accordingly.

When it comes to regular contributions, now it's really important to ensure that you're contributing to the current allocation or your portfolio performance is going to be off in perpetuity.
xinlitik
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by xinlitik »

With TMF potentially doing poorly in a rising interest rate environment, what about adding a financial ETF to the portfolio?

Something like:

45 UPRO
45 TMF
10 FAS
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

xinlitik wrote: Wed Jan 05, 2022 2:25 pm With TMF potentially doing poorly in a rising interest rate environment, what about adding a financial ETF to the portfolio?

Something like:

45 UPRO
45 TMF
10 FAS
It's possible but you need to time it well which is fundamentally against BH philosophy. Over the long-term FAS doesn't perform all that well. I tried last year and failed pretty badly.
texasfight
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by texasfight »

texasfight wrote: Thu Dec 02, 2021 4:59 pm I think FAS (3x financials) mixes VERY well with TQQQ (polar opposites when it comes to factor exposure). VFVA another one I like.

Also since many are getting exposure to yields only thru 20-30 treasuries, it also mixes well with that. See FAS/TQQQ vs. TLT back in March 2021.

UUP is a great addition (we have seen how well this hedges equity + bond drawdowns)

And then broad commodities to hedge "bad inflation" hitting equity multiples.
in relation to the question about FAS. My answer is yes.

One should be holding either QQQ + FAS + broad commodities

or S&P 500 with this strategy

but then again I am I believer in fairly efficient equity markets (and options markets that make price moves in the underlying absolutely bonkers)

I also like adding BTAL

Remember how extremely high beta stocks don't do well over the long term (even in growth like QQQ)

You want to be long apple, Microsoft, amazon, google, facebook, etc. and short 100x sales companies
viajero
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by viajero »

I'd like to raise the possibility of temporarily holding cash instead of TMF this year while we are going to go thru the rate increases. I think's market showed the taste of what is going to be happening for a while until the fed is done with rate increases (they are going to do three). I'm not sure it's a good idea to execute HFEA with two falling assets. Thoughts?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cflannagan »

viajero wrote: Wed Jan 05, 2022 3:40 pm I'd like to raise the possibility of temporarily holding cash instead of TMF this year while we are going to go thru the rate increases. I think's market showed the taste of what is going to be happening for a while until the fed is done with rate increases (they are going to do three). I'm not sure it's a good idea to execute HFEA with two falling assets. Thoughts?
My thoughts? You're making a huge mistake.

IMHO, I feel like you should be more worried about the damage UPRO could do to your numbers if you are not hedged (or go cash instead of using a real hedge).

If the TMF position in HFEA seems too volatile for you - the asset that's there to smooth out the rollercoaster and make things lesser volatile, then I don't think you can stomach UPRO with cash hedge either. I'd say you probably should reduce the allocation to HFEA, or perhaps even bring that allocation to 0%.

The major role of TMF in HFEA is to be the "crash insurance". You're not going to get "crash insurance" out of a cash hedge. You know, March 2020 wasn't that long ago either. Look at what TMF did back then. Even with somewhat negative returns over relatively short period of time, as far as we know, TMF hasn't stopped functioning as a crash insurance.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

viajero wrote: Wed Jan 05, 2022 3:40 pm I'd like to raise the possibility of temporarily holding cash instead of TMF this year while we are going to go thru the rate increases. I think's market showed the taste of what is going to be happening for a while until the fed is done with rate increases (they are going to do three). I'm not sure it's a good idea to execute HFEA with two falling assets. Thoughts?
Time in the market beats timing the market most of the time, and that applies to both stocks and bonds. Tell us: what do you know about future rate increases that hasn't already been priced into the value of long-term US treasury bonds by all other market participants?

Never try to time the market.
viajero
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by viajero »

cos wrote: Wed Jan 05, 2022 3:58 pm
viajero wrote: Wed Jan 05, 2022 3:40 pm I'd like to raise the possibility of temporarily holding cash instead of TMF this year while we are going to go thru the rate increases. I think's market showed the taste of what is going to be happening for a while until the fed is done with rate increases (they are going to do three). I'm not sure it's a good idea to execute HFEA with two falling assets. Thoughts?
Time in the market beats timing the market most of the time, and that applies to both stocks and bonds. Tell us: what do you know about future rate increases that hasn't already been priced into the value of long-term US treasury bonds by all other market participants?

Never try to time the market.
True on timing the market, but.. I'm not sure bonds have already priced in the yield raise - when the fed starts raising bond purchases, the bond prices should inevitably creep down as demand slows, unless I'm missing something.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

zkn wrote: Mon Dec 27, 2021 12:13 pm Shorting SPXU currently costs 3.6% borrowing fee on IBKR. TMV borrowing fee is 23.7%.

I think synthetic short option prices factor in borrowing costs, so I would be surprised if you could short SPXU/TMV much more cheaply with options unless perhaps market markets could borrow these funds much more cheaply (which might be the case).
Does it? I read that somewhere else based on a hedging cost argument; but on the other hand if there is also interest in synthetic longs for the same security, wouldn't the folks with short interest and the folks with long interest act as counterparties for each other?
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

cflannagan wrote: Wed Jan 05, 2022 11:49 am
Afrofreak wrote: Wed Jan 05, 2022 10:18 am
cflannagan wrote: Wed Jan 05, 2022 8:21 am
AlinMC wrote: Wed Jan 05, 2022 5:19 am
60/40 in order to maintain the current ratio. This maximizes performance according to backtests, ensuring rebalance only occurs quarterly.
I'm not aware of any such backtests, can you point me out to those so I can see for myself? Yes, quarterly rebalancing frequency have been backtested, I'm referring to the part where you say it've been backtested to show it's better to make new contributions at current allocations (60/40 for example) than to add money into underperforming asset to bring it back to the target allocation, then add the rest of the new money according to target %'s.
If done correctly, making new contributions to the portfolio makes no difference in the performance (in terms of %) of it, so you can simply backtest as if you had not made any contributions at all. That's kind of the point.

Suppose you have a portfolio that starts at 55/45 UPRO/TMF and by mid-quarter has drifted to 60/40 and you make a contribution. If you split the new money up 60/40, identical to your current allocation, then by default your TWRR but not your MWRR will be the same whether you made that contribution or not. You can test this out by going on PV, set rebalancing to quarterly and check the CAGR. Then, add monthly contributions still with quarterly rebalancing and check again. The CAGR is now the sum of the returns of the portfolio plus contributions but the TWRR will be identical to original CAGR. The only way this is possible is if you contribute at current allocations. If, however, you buy the depreciated asset (in this case TMF) such that your allocation goes back to 55/45, then you have just completed a rebalance halfway through the quarter and that will change both your TWRR and MWRR to the downside according to backtests. This is why it's necessary to contribute at current allocation, so you're not unintentionally rebalancing your portfolio halfway through the quarter.
Okay, yeah I see what you mean. Good to know going forward. Anytime I've been adding new money, I've only been doing those very close to rebalancing dates (like within few trading days), so any thing I "lose" by going with target allocation instead of current allocation if I added new money a few trading days before rebalancing dates should be minimal.
If I'm not mistaken, wouldn't auto investing tools like M1 try to rebalance on deposit? And then wouldn't this imply that the tax drag strategy taken on in taxable accounts where you rebalance through deposits, is moot?

If I take my retirement account (cash), how would I want to DCA that into HFEA? Is there a way to cleverly do it, like suppose each month if the SPY dumps >5%, I do my deposit, but otherwise I'll do it the first of the next month to cover the previous month. Cheers.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

km91 wrote: Tue Dec 28, 2021 5:42 pm
DarkMatter731 wrote: Tue Dec 28, 2021 3:40 pm
Zb3 wrote: Tue Dec 28, 2021 4:02 am Is anyone using IB margin loans in conjunction with this strategy?

I have been in this strategy since July 2019 (although with a 50/50 allocation) and the returns have been amazing. In March last year during the Covid sell-off i took out a small margin loan to pick up some cheap UPRO (in hindsight i wish i had taken out a much larger one). The loan has been slowly paying itself off from dividends and interest earned from the stock yield enhancement program.

This has got me thinking whether it would be worthwhile taking out a margin loan permanently. For example a margin loan of 12.5% would give a total leverage of almost 3.4x and by my calculations could withstand more than a 50% draw-down before getting margin called. For example, if you invest $100k and take out a $12.5k loan to get to $112.5k total, if the portfolio drops 50% to $56.25k, your equity is still $43.75k which exceeds the 75% maintenance margin of $42.2k (using reg T margin).

You could even implement more margin as the market drops or with a portfolio margin account.

Even if you get margin called it isn't the end of the world for small amounts of margin as it seems that IB just liquidates 4x your liquidity deficit in that case.

Ie using the above example, but say you borrowed 15k ($115k value total invested). If the market dropped 50% to $57.5k, your equity is $42.5k which is below the maintenance margin of $43.145k. Therefore it seems that all IB would liquidate is $2,500 worth?

Any thoughts on this approach/anything i am missing?
When I need more leverage than 3x, I use e-mini contracts - it would take a higher drawdown than 50% of your portfolio to get margin called when I'm levered around 3.5-4x using futures.
Could you explain this calculation? Part of my reluctance to use futures is I'm not entirely sure I fully understand the margin mechanics. IB says maintenance on /ES is ~13k per contract, total value per contract is ~$240K, so the required margin rate is ~6%. If I cash collateralize the contract and I want to target 3x leverage I calculate the drawdown in the underlying to trigger a margin call as 30%

Code: Select all

drawdown to margin call = (1 - leverage ratio)/(leverage ratio * (1 - required margin rate))+1

where

leverage ratio = contract value / net liquidation value
required margin rate = $ maintenance / contract value 
Those calculations are in vain. During a large market crash, futures margin requirements typically rise. That is, even on an absolute dollar amount basis, not only as a percentage of notional value. I don't think how much they rise is predictable. I read an article that had the history of futures margin requirements of major global index futures, but I can't locate it right now.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Wed Dec 29, 2021 8:11 am
viajero wrote: Tue Dec 28, 2021 11:57 pm Is there any disadvantage to rebalancing frequently (in a non-taxable account, e.g. Roth IRA)? I want to try 40/60 portfolio with TMF and either TQQQ or SOXL (or possibly 30% TQQQ and 30% SOXL) and I will be funding that account biweekly. Would there be any issues if I rebalance every time I add funds, i.e. biweekly?
I did some backtesting from 1986-2019 with the UPROSIM and TMFSIM daily series, looking at every possible starting day with a fixed duration. My backtesting suggests that there's a mathematical advantage to rebalancing every day or two when TMF has a negative correlation to the equity, because you ratchet the daily counter-movements thousands of times to boost returns. The benefit drops off rapidly with increasing duration between rebalances, and there wasn't much benefit after a week or two; average returns would have been pretty similar (aside from timing luck) with weekly through quarterly rebalancing. Within that range, increasing frequency did reduce the spread in returns from timing luck, however.

The daily rebalance benefit was pretty large; an extra several percent CAGR. This benefit would probably be eaten up by trade slippage (e.g., paying for the privilege of trading), though. I haven't quantified the slippage from actual trading, but on average the slippage will be 6 or 7 times larger with biweekly compared to quarterly rebalancing.
I think the trading friction for liquid ETF and futures shouldn't be more than 0.1% per round trip, I think actually more like 0.01% for futures.
So if we do daily rebalancing but with a very narrow rebalancing band, have you tried simulating something like that?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

TheDoctor91 wrote: Thu Dec 30, 2021 7:42 am I think one of the reasons that HFEA doesn't work well with international and emerging markets funds is because of the currency fluctuations adding a lot of volatility. E.g. XIC.TO has a standard deviation of 13%, the canadian index in canadian dollars, while EWC, ishares canadian index in USD, has a standard deviation of 20%.

Holding any of these funds over a long period of time adds currency fluctuations to the volatiltiy. However, when the currency exchange is going in your favour, the returns can be magnified.
Why do you think it wouldn't work as well with the higher volatility of non-hedged international?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Fri Dec 31, 2021 1:19 pm
bgf wrote: Fri Dec 31, 2021 9:50 am My goal is to essentially track Vanguard's 2050 TDF (VFIFX) but with improved capital efficiency through a little leverage. Right now, my portfolio overall is at 90/10, right on target.

I have a feeling that this being the HFEA thread, the advice will be to not mess with the HFEA allocation; however, my end goal is not to maximize the return from the Roth IRA with HFEA in it, my goal is to maximize the return of my overall portfolio... It looks like to do that, i should optimize my overall portfolio allocation and leverage, and not simply a portion within it.

What do you think?
There are two schools of thought: (i) allocate to keep an overall portfolio balance and (ii) silo off the HFEA as a separate lottery ticket. Both are valid approaches. You are following the first school of thought.

The main thing is to make sure that you can rebalance properly, which is a concern because the funds are in different types of accounts (e.g., Roth vs. deferred vs. taxable) and it is difficult to transfer funds between them. You will likely find that you will need to keep skimming from the HFEA part, so you may need to consider rebalancing in the Roth. From that standpoint, you may want to be careful to keep each account roughly balanced near your overall allocation.
Theoretically one could do a "global optimization" by disregarding asset location boundaries and looking at totals of each asset class across all accounts, with appropriate weights (Roth 100%, deferred x% based on estimated future tax rate, etc.), or not? Tax efficiency of each asset class would determine asset location (with spillover if a location is exhausted). To optimize tax drag, rebalancing would then first occur in the non-taxable accounts, but targeting the "global" asset allocation targets (i.e. not per account). If and when necessary, rebalancing would be aided by taxable.
That should be the optimal approach, or not?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

comeinvest wrote: Wed Jan 05, 2022 6:59 pm
Hydromod wrote: Wed Dec 29, 2021 8:11 am
I did some backtesting from 1986-2019 with the UPROSIM and TMFSIM daily series, looking at every possible starting day with a fixed duration. My backtesting suggests that there's a mathematical advantage to rebalancing every day or two when TMF has a negative correlation to the equity, because you ratchet the daily counter-movements thousands of times to boost returns. The benefit drops off rapidly with increasing duration between rebalances, and there wasn't much benefit after a week or two; average returns would have been pretty similar (aside from timing luck) with weekly through quarterly rebalancing. Within that range, increasing frequency did reduce the spread in returns from timing luck, however.

The daily rebalance benefit was pretty large; an extra several percent CAGR. This benefit would probably be eaten up by trade slippage (e.g., paying for the privilege of trading), though. I haven't quantified the slippage from actual trading, but on average the slippage will be 6 or 7 times larger with biweekly compared to quarterly rebalancing.
I think the trading friction for liquid ETF and futures shouldn't be more than 0.1% per round trip, I think actually more like 0.01% for futures.
So if we do daily rebalancing but with a very narrow rebalancing band, have you tried simulating something like that?
I haven't tried that.

I have implemented a trading algorithm that tries to account for trade timing based on open, low, high, and close. The idea is to randomly locate the times for low and high within the day, and assume linear change between the time instants. I then trade at 2:00 (M1's afternoon window), and take out half of the bid-ask spread for each fund. Presumably that the bid-ask spread depends on volatility, but I have no basis for determining that relationship, I just use a recent value.

To do it right, I'd need to estimate open, low, and high for the mutual funds used as proxies. I petered out before doing that step; they just trade at close.

My impression from the M1 subthread is that M1 has a lot of slippage in trading compared to some brokers.

Just watching the funds during the day, it appears that UPRO and TMF move at different paces. So there'd need to be some work to figure out proper protocols for triggering a trade. Beyond my knowledge for sure.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Wed Jan 05, 2022 8:37 am You are correct that quarterly rebalancing is the most generally accepted method. And I would agree that quarterly rebalancing on the turn of the quarters has tested very well.

My backtesting using UPROSIM and TMFSIM 1986 through 2019 had very different performance depending on which time of the quarter that rebalancing occurs. PV picks an especially favorable time, by coincidence or not.

My backtesting suggests that, considering all possible starting days and neglecting trading slippage, there's a trend towards better or more stable returns as the rebalancing period shrinks and a trend to larger influence of timing luck as the rebalancing period grows.

...

But really, HFEA is quite resilient to all of that. Just pick a strategy and stick with it. Timing luck is a bigger factor than the rebalancing strategy.
I read some of your posts and some of your thread regarding this. But you seem to contradict yourself. What is your final conclusion - is the starting date selection "timing luck", or do you have confidence in the turn-of-the-quarter starting date advantage? Obviously, the turn-of-the-quarter an only be chosen with quarterly rebalancing, so by implication, quarterly would then be superior to smaller intervals. Thanks for clarification.

It looks like there was another backtest showing a ca. 3% p.a. performance advantage of quarterly vs. monthly. That seems big. Is there any plausible explanation for this? I understand we have to subtract the part of it that is attributable to additional risk as more money stayed longer in higher-return asset classes; how large is that effect? Also, if there was high confidence in a quarterly rebalancing bonus vs alternate starting dates, I think that could be easily exploited beyond rebalancing via a strategy.
Last edited by comeinvest on Wed Jan 05, 2022 8:20 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Wed Jan 05, 2022 7:53 pm
comeinvest wrote: Wed Jan 05, 2022 6:59 pm
Hydromod wrote: Wed Dec 29, 2021 8:11 am
I did some backtesting from 1986-2019 with the UPROSIM and TMFSIM daily series, looking at every possible starting day with a fixed duration. My backtesting suggests that there's a mathematical advantage to rebalancing every day or two when TMF has a negative correlation to the equity, because you ratchet the daily counter-movements thousands of times to boost returns. The benefit drops off rapidly with increasing duration between rebalances, and there wasn't much benefit after a week or two; average returns would have been pretty similar (aside from timing luck) with weekly through quarterly rebalancing. Within that range, increasing frequency did reduce the spread in returns from timing luck, however.

The daily rebalance benefit was pretty large; an extra several percent CAGR. This benefit would probably be eaten up by trade slippage (e.g., paying for the privilege of trading), though. I haven't quantified the slippage from actual trading, but on average the slippage will be 6 or 7 times larger with biweekly compared to quarterly rebalancing.
I think the trading friction for liquid ETF and futures shouldn't be more than 0.1% per round trip, I think actually more like 0.01% for futures.
So if we do daily rebalancing but with a very narrow rebalancing band, have you tried simulating something like that?
I haven't tried that.

I have implemented a trading algorithm that tries to account for trade timing based on open, low, high, and close. The idea is to randomly locate the times for low and high within the day, and assume linear change between the time instants. I then trade at 2:00 (M1's afternoon window), and take out half of the bid-ask spread for each fund. Presumably that the bid-ask spread depends on volatility, but I have no basis for determining that relationship, I just use a recent value.

To do it right, I'd need to estimate open, low, and high for the mutual funds used as proxies. I petered out before doing that step; they just trade at close.

My impression from the M1 subthread is that M1 has a lot of slippage in trading compared to some brokers.

Just watching the funds during the day, it appears that UPRO and TMF move at different paces. So there'd need to be some work to figure out proper protocols for triggering a trade. Beyond my knowledge for sure.
I think that's more than I was thinking. One could for example just take end-of-day closing prices for the moment. If they are further away from the target allocation than, say, 0.05%, we rebalance. Then the impact of a round-trip trading loss of liquid futures (my assumption 0.01%) would be rather small, but we could hopefully harvest much of the excess return that you reported with daily rebalancing. The rebalancing could be done manually without algos, at least for a while, as long as I have time to look at my account once a day. But then again I'm sure many quants have tried that before, so I don't expect this to work.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by huzaing »

cflannagan wrote: Wed Jan 05, 2022 3:57 pm
IMHO, I feel like you should be more worried about the damage UPRO could do to your numbers if you are not hedged (or go cash instead of using a real hedge).
Damage means what here? Do you mean UPRO would crash hard, and without TMF the portfolio would suffer?

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

Post by er999 »

huzaing wrote: Wed Jan 05, 2022 11:57 pm
cflannagan wrote: Wed Jan 05, 2022 3:57 pm
IMHO, I feel like you should be more worried about the damage UPRO could do to your numbers if you are not hedged (or go cash instead of using a real hedge).
Damage means what here? Do you mean UPRO would crash hard, and without TMF the portfolio would suffer?

Thanks
Yes upro is leveraged so could go to zero. The Tmf is supposed to preserve enough money so you can keep going after a crash. Look at 2020 crash. From about $80 a share to $20 so wipeout of 75% of value and all recoveries aren’t as quick as this one could take months/ years to recover after the next crash.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 000 »

viajero wrote: Wed Jan 05, 2022 3:40 pm I'd like to raise the possibility of temporarily holding cash instead of TMF this year while we are going to go thru the rate increases. I think's market showed the taste of what is going to be happening for a while until the fed is done with rate increases (they are going to do three). I'm not sure it's a good idea to execute HFEA with two falling assets. Thoughts?
Well on average UPRO + cash is simply a less levered S&P 500 play, though the actual return can diverge due to volatility compounding or decay.

Rising rates can also be bad for stock valuations as the alternative now pays more.

Actually rising rates is pretty bad for most asset prices especially when levered, as the borrow cost will increase.

Finally, are you sure the market is showing that? Maybe what the market has actually priced in is an anticipation that the Fed will chicken out (not saying I believe this, but it could be).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AlinMC »

We can have a look at how the strategy fared in a raising rates environment throughout 2017-2018 with multiple interest raise hikes:
Image

Image

55/45 UPRO/TMF Simulated CAGR:
2017: +46.80%
2018: -14.83%
2019: +72.33%


Source: https://www.portfoliovisualizer.com/bac ... on3_3=-200

Edit: resized images.
Last edited by AlinMC on Thu Jan 06, 2022 6:01 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bigblue1ca »

AlinMC wrote: Thu Jan 06, 2022 1:52 am We can have a look at how the strategy fared in a raising rates environment throughout 2017-2018 with multiple interest raise hikes:

...

55/45 UPRO/TMF Simulated CAGR:
2017: +49.95%
2018: -13.01%
2019: +76.02%
Comparing the rate increases in 2017-2018 to today, isn't a straight up comparison. That was a very different environment.

CPI Jan 2017 - 243.62 / Dec 2018 - 253.495 - 3.64% Increase

CPI Jan 2020 - 258.687 / Nov 2021 (most recent) 278.883 - 7.81% increase

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

Inflation hasn't been this high since the early 80s. What did Treasuries do then? Oh that's right, they were callable prior to '85 so that's not apples to apples either.

I personally think if the Fed can gradually get inflation under control and bring it down with small and steady rate increases, HFEA should be okay.

But, on the flip side, if the Fed can't do that and inflation stays this high, or worse goes up (inflation begets inflation), and they have to raise rates fast to stop it. 😨 In that situation, smart money (big money) won't jump into Treasuries they'll go into commodities for security.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

bigblue1ca wrote: Thu Jan 06, 2022 5:17 am But, on the flip side, if the Fed can't do that and inflation stays this high, or worse goes up (inflation begets inflation), and they have to raise rates fast to stop it. 😨 In that situation, smart money (big money) won't jump into Treasuries they'll go into commodities for security.
If rates raise quickly, won't smart money jump into bonds once the rates are up? Wouldn't they only go to commodities temporarily if anticipating this unexpected rapid raise to occur?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

comeinvest wrote: Wed Jan 05, 2022 7:59 pm I read some of your posts and some of your thread regarding this. But you seem to contradict yourself. What is your final conclusion - is the starting date selection "timing luck", or do you have confidence in the turn-of-the-quarter starting date advantage? Obviously, the turn-of-the-quarter an only be chosen with quarterly rebalancing, so by implication, quarterly would then be superior to smaller intervals. Thanks for clarification.

It looks like there was another backtest showing a ca. 3% p.a. performance advantage of quarterly vs. monthly. That seems big. Is there any plausible explanation for this? I understand we have to subtract the part of it that is attributable to additional risk as more money stayed longer in higher-return asset classes; how large is that effect? Also, if there was high confidence in a quarterly rebalancing bonus vs alternate starting dates, I think that could be easily exploited beyond rebalancing via a strategy.
I guess a good place to illustrate the starting point issue is the first plot here. The gray line is the original 40/60 HFEA strategy.

I ran a separate simulation using UPROSIM and TMFSIM starting each day in the first quarter of the data. With 60-day rebalancing, the spread in CAGR for the next 32 years ranged from 14 to 16.5%. This isn't precisely quarterly rebalancing, but close.

The first figure here illustrates the timing luck. These were the same type of simulation, starting each day of the first quarter. All of these simulations have exactly the same rebalancing schedule, just offset by a single day one to the next. There are distinct jumps at certain events. Those jumps illustrate the timing luck of starting date, which widens the spread in returns over time.

So I think that historically there appears to have been an actual bias to quarterly rebalancing on the quarters, but I don't feel comfortable claiming that this can't be coincidence. I recommend folks rebalance on the turn of the quarter when doing quarterly rebalancing, but try to claim that this may just be superstition based on timing luck during a handful of consequential events experienced during backtesting.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

viajero wrote: Wed Jan 05, 2022 4:33 pm True on timing the market, but.. I'm not sure bonds have already priced in the yield raise - when the fed starts raising bond purchases, the bond prices should inevitably creep down as demand slows, unless I'm missing something.
What if they are less hawkish than you think they are and the market crashes?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

hiddenpower wrote: Thu Jan 06, 2022 7:59 am
bigblue1ca wrote: Thu Jan 06, 2022 5:17 am But, on the flip side, if the Fed can't do that and inflation stays this high, or worse goes up (inflation begets inflation), and they have to raise rates fast to stop it. 😨 In that situation, smart money (big money) won't jump into Treasuries they'll go into commodities for security.
If rates raise quickly, won't smart money jump into bonds once the rates are up? Wouldn't they only go to commodities temporarily if anticipating this unexpected rapid raise to occur?
This. “Smart money” that seeks safety will continue to seek out government treasury bonds. Interest rates being higher just makes them more attractive.

Also, inflation is looked at generally year-over-year. Obviously when government mandates an economic shutdown in midst of pandemic, and then immediately reopens everything, you’re going to go from zero to sixty very quick which is what happened. There isn’t much reason to believe that GOING FORWARD, now that everything has reopened, prices will continue to increase more than they would have pre-COVID. I’m not trying to speculate but why would anyone assume that the dollar is going to become weaker against other currencies? Against the goods that China sells, for example? Why would PRIOR inflation (which really has only persisted for <1 year) have anything to do with how the dollar will behave relative to other currencies/goods going forward? I understand that it’s POSSIBLE that inflation begets inflation but i would think we’d need a lot stronger inflation than 5-7% over the course of a few months for that to be a factor.

Lastly, it’s UNEXPECTED inflation that kills HFEA. TMF and UPRO already have a certain amount of expected inflation priced in. We could have 5% inflation this month but if the market expected 6% then TMF may actually have a big rebound.

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

Post by cardiology »

Hydromod, looked over your graphs. I don't see how these show that rebalancing on a particular day in the quarter would be helpful/
I don't have an engineering background but do understand some statistics.
Do you have a graph that shows CAGR vs rebalance day (e.g. Jan 1 v Jan 2...mar 29 vs mar 30).
Thanks for your contributions, btw, I don't udnerstand everything you write but I do learn from reading your posts.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

cardiology wrote: Thu Jan 06, 2022 1:58 pm Hydromod, looked over your graphs. I don't see how these show that rebalancing on a particular day in the quarter would be helpful/
I don't have an engineering background but do understand some statistics.
Do you have a graph that shows CAGR vs rebalance day (e.g. Jan 1 v Jan 2...mar 29 vs mar 30).
Thanks for your contributions, btw, I don't udnerstand everything you write but I do learn from reading your posts.
I appreciate that my graphs are pretty intense. I like to cross compare lots of stuff, but I know it's hard to follow sometimes.

I haven't specifically done the rebalancing on a day of the quarter basis, I've always just done uniform timing.

There was a reddit post last month that was interesting on this point. I haven't verified it. The link to Boglehead discussion is here; it has the link to the reddit post.

If the work checks out, it's pretty convincing. It almost looks too good, though.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Those using crypto as an alternate hedge to TMF for HFEA should be very careful as this most recent drop revealed it may closely correlate with equities - and therefore, may not be a hedge at all.
Last edited by tomphilly on Thu Jan 06, 2022 3:48 pm, edited 2 times in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

tomphilly wrote: Thu Jan 06, 2022 3:34 pm Those using crypto as an alternate hedge to TMF for HFEA should be very careful as this most recent drop revealed they may correlate with equities.
Who on earth..? :oops:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Afrofreak wrote: Thu Jan 06, 2022 3:36 pm
tomphilly wrote: Thu Jan 06, 2022 3:34 pm Those using crypto as an alternate hedge to TMF for HFEA should be very careful as this most recent drop revealed they may correlate with equities.
Who on earth..? :oops:
I should clarify - I didn't mean some HFEA hedges being entirely crypto. I believe some folks here are using a bit of it (or a bit of gold) with TMF. It's come up in the thread, somewhere.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Kbg »

tomphilly wrote: Thu Jan 06, 2022 3:45 pm I should clarify - I didn't mean some HFEA hedges being entirely crypto. I believe some folks here are using a bit of it (or a bit of gold) with TMF. It's come up in the thread, somewhere.
Not after the lottery ticket...my long-time mix

25% TQQQ
30% TMF
20% IAUM/SGOL
25% BND

If anything backtesting has suggested having some dry powder on hand. If you do, it's less difficult to make up lost ground.

Rather than the homerun, looking for some doubles and triples ;-)
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DarkMatter731 »

comeinvest wrote: Wed Jan 05, 2022 6:47 pm
km91 wrote: Tue Dec 28, 2021 5:42 pm
DarkMatter731 wrote: Tue Dec 28, 2021 3:40 pm
Zb3 wrote: Tue Dec 28, 2021 4:02 am Is anyone using IB margin loans in conjunction with this strategy?

I have been in this strategy since July 2019 (although with a 50/50 allocation) and the returns have been amazing. In March last year during the Covid sell-off i took out a small margin loan to pick up some cheap UPRO (in hindsight i wish i had taken out a much larger one). The loan has been slowly paying itself off from dividends and interest earned from the stock yield enhancement program.

This has got me thinking whether it would be worthwhile taking out a margin loan permanently. For example a margin loan of 12.5% would give a total leverage of almost 3.4x and by my calculations could withstand more than a 50% draw-down before getting margin called. For example, if you invest $100k and take out a $12.5k loan to get to $112.5k total, if the portfolio drops 50% to $56.25k, your equity is still $43.75k which exceeds the 75% maintenance margin of $42.2k (using reg T margin).

You could even implement more margin as the market drops or with a portfolio margin account.

Even if you get margin called it isn't the end of the world for small amounts of margin as it seems that IB just liquidates 4x your liquidity deficit in that case.

Ie using the above example, but say you borrowed 15k ($115k value total invested). If the market dropped 50% to $57.5k, your equity is $42.5k which is below the maintenance margin of $43.145k. Therefore it seems that all IB would liquidate is $2,500 worth?

Any thoughts on this approach/anything i am missing?
When I need more leverage than 3x, I use e-mini contracts - it would take a higher drawdown than 50% of your portfolio to get margin called when I'm levered around 3.5-4x using futures.
Could you explain this calculation? Part of my reluctance to use futures is I'm not entirely sure I fully understand the margin mechanics. IB says maintenance on /ES is ~13k per contract, total value per contract is ~$240K, so the required margin rate is ~6%. If I cash collateralize the contract and I want to target 3x leverage I calculate the drawdown in the underlying to trigger a margin call as 30%

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drawdown to margin call = (1 - leverage ratio)/(leverage ratio * (1 - required margin rate))+1

where

leverage ratio = contract value / net liquidation value
required margin rate = $ maintenance / contract value 
Those calculations are in vain. During a large market crash, futures margin requirements typically rise. That is, even on an absolute dollar amount basis, not only as a percentage of notional value. I don't think how much they rise is predictable. I read an article that had the history of futures margin requirements of major global index futures, but I can't locate it right now.
Yes, margin requirements do rise as volatility in the market rises. CME publishes historical margins from 2003 onwards and you can check them out here if you're curious.

https://www.cmegroup.com/clearing/risk- ... rgins.html

$24,000 was the maintenance margin in 2008 when the notional value of the contract was around $80,000, giving a percentage of roughly 30% in maintenance margin required. For reference, it's around 7.75% right now which shows you how quickly maintenance margin changes. Nevertheless, I'm not too worried about margin calls - worst comes to worst, your broker will liquidate some of your holdings such that your excess liquidity value returns to a positive figure. You may get a bad price but in a way, your broker is practicing risk management for you.
akxc
Posts: 19
Joined: Thu Jan 06, 2022 5:20 pm

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

Post by akxc »

The following chart shows the difference in annualized return for quarterly compared to daily rebalancing based on which day of the quarter is used for rebalancing. I also deducted a 0.1% expense on the amount being transferred between the two funds in each rebalance (current 30 day bid ask spread is .04% for TMF and .02% for UPRO). Sure enough, rebalancing right on the quarter has significantly outperformed other rebalancing periods. But on average, there is a significant benefit to rebalancing daily. Over the simulated Hedgefundie 1986-2019 dataset, this works out to a 92 basis point premium for rebalancing daily over quarterly. I'm inclined to believe the benefit of rebalancing on/around the quarter over the actual life of UPRO/TMF is just by chance based on this analysis.

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viajero
Posts: 38
Joined: Fri Nov 20, 2020 1:42 pm

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

Post by viajero »

akxc wrote: Thu Jan 06, 2022 10:04 pm The following chart shows the difference in annualized return for quarterly compared to daily rebalancing based on which day of the quarter is used for rebalancing. I also deducted a 0.1% expense on the amount being transferred between the two funds in each rebalance (current 30 day bid ask spread is .04% for TMF and .02% for UPRO). Sure enough, rebalancing right on the quarter has significantly outperformed other rebalancing periods. But on average, there is a significant benefit to rebalancing daily. Over the simulated Hedgefundie 1986-2019 dataset, this works out to a 92 basis point premium for rebalancing daily over quarterly. I'm inclined to believe the benefit of rebalancing on/around the quarter over the actual life of UPRO/TMF is just by chance based on this analysis.

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Apologies for a silly question, but when you say "rebalancing on the quarter" do you mean first working day of each quarter? Like, this year it would be Jan 3, then April 1 etc?
akxc
Posts: 19
Joined: Thu Jan 06, 2022 5:20 pm

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

Post by akxc »

viajero wrote: Fri Jan 07, 2022 12:05 am Apologies for a silly question, but when you say "rebalancing on the quarter" do you mean first working day of each quarter? Like, this year it would be Jan 3, then April 1 etc?
Yes, by on the quarter I mean rebalancing on the first market day of January/April/July/October. And each of the other points on the x-axis represents a different day in a quarter as your rebalancing day. So for example, the points on the graphs at '30' would represent the difference in return if you chose to do your quarterly rebalances each year in mid February/May/August/November.
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