Riding HEDGEFUNDIE’s excellent adventure

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
horizon
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by horizon »

rchmx1 wrote: Sun Sep 05, 2021 11:02 pm

What is LTTs? Sorry I am new here so still learning.
Long Term Treasuries, as distinguished from Intermediate Term or Short Term.
[/quote]

Thank you.
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typical.investor
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

Hydromod wrote: Sun Sep 05, 2021 10:21 pm
horizon wrote: Sun Sep 05, 2021 10:08 pm Good luck everyone on this journey. In my case, it was kind of bad experience. I put 50% of the IRA in TQQQ early 2020 and can not handle the drawdown during Mar 2020. So, I cut loss my TQQQ position and had to build it back again. If I left them there alone, my IRA would be 3 times bigger. I do feel bad about myself cut loss TQQQ that time.
Hope everybody have a nice ride with the 3x ETF.
I feel for you. If I had left the portfolio untouched since 2/20/2020 until now, it would be up 3.4x instead of 2x (albeit extremely overbalanced to TQQQ).

But I learned an awful lot about how to handle 3x LETFs in order to not make the same mistakes again, and I expect that over the next ten years I may be far better off because of these very expensive lessons.

Hopefully you will be able to use the pain as motivation to do better next time.
Um you mean like have a safe asset to rebalance into 3X equities from? That was central to the strategy from day 1.
investor.was.here
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by investor.was.here »

Ramjet wrote: Thu Aug 05, 2021 2:50 pm Why are so many people making monthly contributions?
The performance of the portfolio does considerably better with monthly contributions than with lump sum. I'm actually considering depositing a lump sum in anchor protocol and using the interest for monthly payments to my HFEA portfolio. Eventually, you can possibly use margin borrowing to fund the contributions even, assuming the interest rates hold up in the crypto space and you can find a broker to offer margin borrowing against leveraged funds.
Hydromod
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Hydromod »

typical.investor wrote: Mon Sep 06, 2021 2:33 am
Hydromod wrote: Sun Sep 05, 2021 10:21 pm I feel for you. If I had left the portfolio untouched since 2/20/2020 until now, it would be up 3.4x instead of 2x (albeit extremely overbalanced to TQQQ).

But I learned an awful lot about how to handle 3x LETFs in order to not make the same mistakes again, and I expect that over the next ten years I may be far better off because of these very expensive lessons.

Hopefully you will be able to use the pain as motivation to do better next time.
Um you mean like have a safe asset to rebalance into 3X equities from? That was central to the strategy from day 1.
No, not exactly. Note that TQQQ more than tripled from February 2020 to present, while TMF has dropped a little, so my initially balanced portfolio now would be really out of whack without rebalancing. My little bad history reminder spreadsheet doesn't rebalance. Actually, now that I just checked with PV, a 2x increase is about what I should have gotten with reasonable rebalancing, and I feel much better that I didn't toss away 1/3 (and counting) of the portfolio.

2020 was the first time I'd ever paid attention during a crash, so I made some behavioral mistakes for about a month and a half by winging it without a real plan or understanding of what to expect.

So I went back to the drawing board to really figure out how to implement a strategy that I can live with without overthinking in the heat of the moment. For me, that meant I needed to really understand what goes on with volatility and trends for different index funds. And if it is implemented in taxable, what the implications are.

My key (to me) insight was when I figured out that (i) the average future return for the next week/month/quarter has historically not been very different regardless of how volatile the fund has been recently or the trend of the fund, and (ii) recent volatility does have some predictive capacity for near-future volatility. So overall portfolio volatility can be reduced on average, without much affecting overall returns, by increasing high-return asset allocations when they have lower predicted volatility and reducing the asset allocations when they have higher predicted volatility. Or the same volatility can be maintained using riskier average allocations by shifting allocations preferentially to lower-volatility periods.

I ended up with a strategy that looks like it would have yielded about 1/3 larger Sharpe ratio for the same portfolio volatility as a quarterly rebalanced 55/45 UPRO/TMF since 1991 (using UPRO/TQQQ/TYD/TMF), with portfolio drawdowns less than 40% (2020) and less than 30% (otherwise). In a taxable account, I expect the tax drag to average something like a 2% equivalent ER. Note that the same strategy also would cut volatility significantly with 1x and 2x funds, but might not be especially attractive with 1x funds because trading costs would cut into returns.

Rebalancing is based on bands, normally triggering at reasonable intervals, except that the strategy has predefined weekly checks when the market is very active; this gives me clear-cut actions to head off emotional decisions in the heat of the moment.

So basically I got myself very comfortable with understanding what to expect, have an approach that I believe in based on extensive testing, and have a blueprint on how to deal with future market behavior without agonizing over decisions or second-guessing decisions.

I think those behavioral things are generally important for investing, but are especially important to handling 2x and 3x LETFs.
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typical.investor
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

Hydromod wrote: Mon Sep 06, 2021 2:34 pm
typical.investor wrote: Mon Sep 06, 2021 2:33 am
Hydromod wrote: Sun Sep 05, 2021 10:21 pm I feel for you. If I had left the portfolio untouched since 2/20/2020 until now, it would be up 3.4x instead of 2x (albeit extremely overbalanced to TQQQ).

But I learned an awful lot about how to handle 3x LETFs in order to not make the same mistakes again, and I expect that over the next ten years I may be far better off because of these very expensive lessons.

Hopefully you will be able to use the pain as motivation to do better next time.
Um you mean like have a safe asset to rebalance into 3X equities from? That was central to the strategy from day 1.
No, not exactly. Note that TQQQ more than tripled from February 2020 to present, while TMF has dropped a little, so my initially balanced portfolio now would be really out of whack without rebalancing. My little bad history reminder spreadsheet doesn't rebalance. Actually, now that I just checked with PV, a 2x increase is about what I should have gotten with reasonable rebalancing, and I feel much better that I didn't toss away 1/3 (and counting) of the portfolio.


...

Rebalancing is based on bands, normally triggering at reasonable intervals, except that the strategy has predefined weekly checks when the market is very active; this gives me clear-cut actions to head off emotional decisions in the heat of the moment.
I see. PV doesn't have good rebalance data for me as it is at most once a month.

In March 2020, I sold TMF three times for between $38-$50 compared to its $29 now and bought UPRO for between $17-$45 compared to its $133 today.

Timing is difficult so the $17 UPRO purchase wasn't for that much as it was the third time rebalancing in March.

Avoiding UPRO when things get volatile seems difficult to time to me based on my reading of momentum strategies. I hope it works out for you.
Hydromod
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Hydromod »

typical.investor wrote: Mon Sep 06, 2021 4:00 pm I see. PV doesn't have good rebalance data for me as it is at most once a month.

In March 2020, I sold TMF three times for between $38-$50 compared to its $29 now and bought UPRO for between $17-$45 compared to its $133 today.

Timing is difficult so the $17 UPRO purchase wasn't for that much as it was the third time rebalancing in March.

Avoiding UPRO when things get volatile seems difficult to time to me based on my reading of momentum strategies. I hope it works out for you.
The risk-budget minimum variance approach I'm using is basically a type of inverse volatility model that accounts for covariances. It just shades the allocations up and down (a UPRO/TMF pair might vary between 30/70 and 70/30, for example) to keep volatilities low, but there's no consideration of returns at all except for the overall fraction of risk assigned to equities versus treasuries. So not a momentum strategy in any way.

Its strength is getting equity allocations tuned down early in crashes as volatilities rise, at the cost of missing big rebounds. So more a strategy of consistent singles and doubles than a few home runs. This fits me because I'm not too far from decumulation, so I'm much happier with consistent 20 to 40% returns than a series of moon shots mixed with strikeouts.

March 2020 was the worse performing period since 1987 for this kind of approach; it's the short sharp shocks that have given it the most trouble and where experience and knowledge may have a big advantage. Frankly I'm terrible at handling big fluctuations, so I'm happy to keep to working the statistical edge instead.
NewEnglandVolley
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by NewEnglandVolley »

A minor update on my HFEA fund. Since investing in August 15th, 2021 as of Sept 15th the HF Portfolio has gained just under 3% while S&P change was 0.77%.

However it looks like HF will have some rough times ahead. This strategy hasn't been fully tested since COVID but with China's Evergrand troubles perhaps we'll see a March 2020 type drop again. Note that there definitely was a lull in HFEA during late summer of 2020 and early 2021 but we've seen only positive month over month growth since the end of February per Portfolio Visualizer. I suppose it wouldn't be a bad time to watch for an overall market drop and allocate a bit more into HFEA.
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Tuesday
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Tuesday »

For about a month, I have had a small portion of my portfolio devoted to HFEA with one goal being learning about my risk tolerance. I believe I can withstand the volatility of HFEA without sabotaging myself, but they say you won't know how you'll react in a bear market until you endure one. I've only ever endured small market drops; I was uninvested during the March 2020 crash as I was purchasing a house. Maybe this is fortunate, but it also means I can't confirm what I think I know about my risk tolerance. I'm excited for upcoming volatility for this reason.

After I first began investing in my early 20s, I paid much more attention to "market news" for a few weeks, but eventually lost interest while remaining comfortable contributing annually. I've yet to see if this will be the case with investing in HFEA, as well. So far, I've been paying attention to investing news a bit more with my interest waning rapidly. When crashes inevitably occur, I expect to remain comfortable as I believe the biggest type of threat to HFEA is behavioral. I won't be positive until this happens, though.
Alaric
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Alaric »

Start date: 02/27/19
Approach: Fixed allocation: 02/27/19 — 10/01/19: 40/60 UPRO/TMF
10/01/19 — 02/10/20: 55/45 UPRO/TMF
02/11/20 — 12/31/20: 30/25/45 UPRO/TQQQ/TMF
01/01/21 — present: 30/30/40 UPRO/TQQQ/TMF
Rebalancing frequency: Quarterly (actual rebalances 10/1/19; 2/11/20; 4/6/20; 7/1/20; 10/1/20; 1/6/21; 3/31/21; 7/1/21; 9/30/21)
Return (Total / CAGR): 126.7% / 53.1%
Initial contribution: $10k (~5% of invested assets) 2/27/19
Additional contributions: $28.5k added 2/11/20
HFEA weight of total portfolio: 16%
Portfolio location: Roth IRA with E*Trade
jeremyl
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by jeremyl »

jeremyl wrote: Fri Apr 02, 2021 5:55 am
jeremyl wrote: Fri Jan 01, 2021 7:39 am Giving this a go to start the new year on Monday 1/4. Right now plan to do in a separate Roth IRA with Fidelity but contemplating a taxable at Fidelity to help with goal of being FIRE as I need the taxable to grow to cover the gap years until pension can kick in if I do FIRE.


Start date: 1/4/21
Approach: Fixed allocation - 55/45 UPRO/TMF
Rebalancing frequency: Quarterly
Return (total / YTD):
Initial contribution: $10,000 (just under 3% of our portfolio)
Additional contributions: Yearly Roth amounts unless I start in taxable.
Rebalanced this week. I went with 60/40 on the rebalance.
Made just a little bit this quarter.

Start date: 1/4/21
Approach: Fixed allocation - 55/45 UPRO/TMF
Rebalancing frequency: Quarterly
Return (total / YTD): 1.67%
Initial contribution: $10,000 (just under 3% of our portfolio)
Rebalanced this week. Went from about 63/37 upro/tmf allocation back to 55/45.

I didn't rebalance after quarter 2.

Start date: 1/4/21
Approach: Fixed allocation - 55/45 UPRO/TMF
Rebalancing frequency: Quarterly
Return (total / YTD): 24%
Initial contribution: $10,000 (still just under 3% of our portfolio)
billb
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by billb »

I started my variation on April 15th. It's 30UPRO/30TQQQ/40TMF. It's a small portion of my overall account, so I can take the drawdown. I plan on just letting it ride. (edit for clarification, letting it ride meaning no additional funds to add, but am doing quarterly rebalancing).

I started out instantly with a 10% drawdown. Ain't that how it always goes. August was as high as 20+% return and gave back a lot in September. It's quite volatile. As of October 1st, I'm up 12.81%. Here's the roller coaster.

Image
Sketch24
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Sketch24 »

Hydromod wrote: Fri Aug 06, 2021 1:28 pm
jarjarM wrote: Thu Aug 05, 2021 8:01 pm True, if one expect to have significant out performance for this strategy, lump sum to start in a tax advantaged account is the best. Since there's lots of volatility of the individual components, contribution to the lower performing component should work well. Of course the tax drag will be somewhat significant if there's a need to sell and rebalance in the taxable account, hopefully one can do that in a low tax year. :oops:
This is the standard thinking: best in order of (i) Roth, (ii) tax-deferred, and last (iii) taxable.

There's no question that Roth is best.

It's not so clear that tax-deferred is necessarily better than taxable.

In tax-deferred, withdrawals are ordinary income, so large withdrawals can incur up to significant brackets.

In taxable, withdrawals are long-term capital gains, which is 15 or 20% (which can be significantly cheaper, depending on how much is withdrawn).

Tax-deferred rebalancing doesn't have a tax hit.

Taxable rebalancing can be done with LTCG, using relatively new shares with more modest gains (I think M1 does this automatically), which might correspond to 1 or 2% ER (consider x turnover during rebalance * y growth in basis * LTCG tax rate).

It may be worthwhile to take the early growth hit if you intend to consume at high levels and can meet the goal either way.

Just spitballing here.
Where would a non-deductible tIRA fit in here? It's seems like the most important thing for this portfolio is rebalancing at least quarterly to ensure that you have enough money in bonds to buyback stocks if they take a big hit in a downturn. Wouldn't having to rebalance in a taxable account for a fund that might have wild upswings in profit be difficult to do efficiently in a taxable account? My state and city also don't treat long term capital gains differently than short term cap gains so taxable accounts really take a hit for rebalancing.
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CanaBogle24
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by CanaBogle24 »

Well, the last month has been unpleasant. But I suppose we were spoiled by the year prior. If the post-September period looks anything like last year's post-September run, it should be a fun ride 8-)

Start date: 9/28/20
Approach: Fixed allocation - 33/32/35 UPRO/TQQQ/TMF (drifted to 38/34/28 before this latest rebalance)
Rebalancing frequency: Quarterly
Return (total / YTD): +44.28% / unknown due to M1 Finance's (annoying) lack of YTD return data
Contributions: $48k initial + $15k incremental (total is ~10% of invested assets)
Portfolio location: Taxable, M1Finance
Covafish
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Covafish »

About to jump in
Start date: 10/12/2021
Approach: Fixed allocation - 30/30/40 UPRO/TQQQ/TMF
Rebalancing frequency: Quarterly
Contributions: $20k initial, will review quarterly
billb
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by billb »

Covafish wrote: Tue Oct 12, 2021 1:42 pm About to jump in
Start date: 10/12/2021
Approach: Fixed allocation - 30/30/40 UPRO/TQQQ/TMF
Rebalancing frequency: Quarterly
Contributions: $20k initial, will review quarterly
I have the exact same allocation. It's a ride. Good luck.
manlymatt83
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by manlymatt83 »

Is this generally OK to do in a taxable if you only rebalance with new contributions?
jarjarM
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by jarjarM »

manlymatt83 wrote: Thu Oct 14, 2021 12:16 pm Is this generally OK to do in a taxable if you only rebalance with new contributions?
It's okay to do this in taxable but the tax drag will dependent heavily on your income, amount invested and new contribution. Someone in the HFEA 2nd thread did some tax simulation and the drag is only a couple of percentage points on the CAGR. Of course, future tax rate is unknowable too.
manlymatt83
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by manlymatt83 »

jarjarM wrote: Thu Oct 14, 2021 1:36 pm
manlymatt83 wrote: Thu Oct 14, 2021 12:16 pm Is this generally OK to do in a taxable if you only rebalance with new contributions?
It's okay to do this in taxable but the tax drag will dependent heavily on your income, amount invested and new contribution. Someone in the HFEA 2nd thread did some tax simulation and the drag is only a couple of percentage points on the CAGR. Of course, future tax rate is unknowable too.
A poster in a related thread suggested some in both accounts, which might fit the bill nicely. $25k in taxable, $25k in tax advantaged, rebalance only in tax advantaged. ¯\_(ツ)_/¯
jarjarM
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by jarjarM »

manlymatt83 wrote: Thu Oct 14, 2021 1:40 pm
jarjarM wrote: Thu Oct 14, 2021 1:36 pm
manlymatt83 wrote: Thu Oct 14, 2021 12:16 pm Is this generally OK to do in a taxable if you only rebalance with new contributions?
It's okay to do this in taxable but the tax drag will dependent heavily on your income, amount invested and new contribution. Someone in the HFEA 2nd thread did some tax simulation and the drag is only a couple of percentage points on the CAGR. Of course, future tax rate is unknowable too.
A poster in a related thread suggested some in both accounts, which might fit the bill nicely. $25k in taxable, $25k in tax advantaged, rebalance only in tax advantaged. ¯\_(ツ)_/¯
Yeah I saw skier's input, I think that's fine too as long as your tax advantaged account grow at a reasonable rate (from new contribution) compare to taxable.
manlymatt83
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by manlymatt83 »

jarjarM wrote: Thu Oct 14, 2021 1:42 pm
manlymatt83 wrote: Thu Oct 14, 2021 1:40 pm
jarjarM wrote: Thu Oct 14, 2021 1:36 pm
manlymatt83 wrote: Thu Oct 14, 2021 12:16 pm Is this generally OK to do in a taxable if you only rebalance with new contributions?
It's okay to do this in taxable but the tax drag will dependent heavily on your income, amount invested and new contribution. Someone in the HFEA 2nd thread did some tax simulation and the drag is only a couple of percentage points on the CAGR. Of course, future tax rate is unknowable too.
A poster in a related thread suggested some in both accounts, which might fit the bill nicely. $25k in taxable, $25k in tax advantaged, rebalance only in tax advantaged. ¯\_(ツ)_/¯
Yeah I saw skier's input, I think that's fine too as long as your tax advantaged account grow at a reasonable rate (from new contribution) compare to taxable.
Thanks!
skierincolorado
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
TheDoctor91
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by TheDoctor91 »

skierincolorado wrote: Thu Oct 14, 2021 2:09 pm Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
How?
skierincolorado
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

TheDoctor91 wrote: Fri Oct 15, 2021 3:12 am
skierincolorado wrote: Thu Oct 14, 2021 2:09 pm Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
How?
Instead of doing 10% of net worth in HFEA which is 165/135 stock/LTT, do 20% of one's portfolio in 135/165 stock/ITT. The latter portfolio has higher risk adjusted returns.

If we look at the 10% in HFEA and the other 10% that we are moving from (assuming) VTI to modified HFEA:

Originally 10% HFEA + 10% VTI = 132.5/67.5 stock/LTT for that 20% of your portfolio (ignoring the other 80%)

New 20% in modified HFEA = 135/165 stock/ITT (again ignoring the other 80% of your portfolio)

Let's run the PV for that 20%. The red line is 20% 'modified' HFEA. The blue line is 10% HFEA + 10% VTI. The red line has much higher CAGR and a lower max-drawdown. 'Modified' HFEA can be implemented with TYD or TYA (LETFs), or with futures contracts.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
perfectuncertainty
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by perfectuncertainty »

skierincolorado wrote: Fri Oct 15, 2021 8:59 am
TheDoctor91 wrote: Fri Oct 15, 2021 3:12 am
skierincolorado wrote: Thu Oct 14, 2021 2:09 pm Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
How?
Instead of doing 10% of net worth in HFEA which is 165/135 stock/LTT, do 20% of one's portfolio in 135/165 stock/ITT. The latter portfolio has higher risk adjusted returns.

If we look at the 10% in HFEA and the other 10% that we are moving from (assuming) VTI to modified HFEA:

Originally 10% HFEA + 10% VTI = 132.5/67.5 stock/LTT for that 20% of your portfolio (ignoring the other 80%)

New 20% in modified HFEA = 135/165 stock/ITT (again ignoring the other 80% of your portfolio)

Let's run the PV for that 20%. The red line is 20% 'modified' HFEA. The blue line is 10% HFEA + 10% VTI. The red line has much higher CAGR and a lower max-drawdown. 'Modified' HFEA can be implemented with TYD or TYA (LETFs), or with futures contracts.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
What actual vehicles apart from futures would you propose using to accomplish that? Thanks
skierincolorado
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

perfectuncertainty wrote: Sun Oct 17, 2021 11:15 am
skierincolorado wrote: Fri Oct 15, 2021 8:59 am
TheDoctor91 wrote: Fri Oct 15, 2021 3:12 am
skierincolorado wrote: Thu Oct 14, 2021 2:09 pm Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
How?
Instead of doing 10% of net worth in HFEA which is 165/135 stock/LTT, do 20% of one's portfolio in 135/165 stock/ITT. The latter portfolio has higher risk adjusted returns.

If we look at the 10% in HFEA and the other 10% that we are moving from (assuming) VTI to modified HFEA:

Originally 10% HFEA + 10% VTI = 132.5/67.5 stock/LTT for that 20% of your portfolio (ignoring the other 80%)

New 20% in modified HFEA = 135/165 stock/ITT (again ignoring the other 80% of your portfolio)

Let's run the PV for that 20%. The red line is 20% 'modified' HFEA. The blue line is 10% HFEA + 10% VTI. The red line has much higher CAGR and a lower max-drawdown. 'Modified' HFEA can be implemented with TYD or TYA (LETFs), or with futures contracts.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
What actual vehicles apart from futures would you propose using to accomplish that? Thanks
FIrst choice would be futures obviously for lowest cost, but UPRO + TYD or TYA I think is perfectly acceptable - if you are comfortable with the management of those funds.

Another option would be to do a box-spread loan for the equity portion + TYD or TYA for the bond portion.
perfectuncertainty
Posts: 386
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by perfectuncertainty »

skierincolorado wrote: Sun Oct 17, 2021 11:38 am
perfectuncertainty wrote: Sun Oct 17, 2021 11:15 am
skierincolorado wrote: Fri Oct 15, 2021 8:59 am
TheDoctor91 wrote: Fri Oct 15, 2021 3:12 am
skierincolorado wrote: Thu Oct 14, 2021 2:09 pm Oof. I didn't realize how many people in this thread were doing only a small part of their portfolio in HFEA. For all those people, may I suggest allocating a slightly larger portion of your portfolio to a modified HFEA that is less risky and more efficient?

https://www.portfoliovisualizer.com/bac ... on4_2=-300
How?
Instead of doing 10% of net worth in HFEA which is 165/135 stock/LTT, do 20% of one's portfolio in 135/165 stock/ITT. The latter portfolio has higher risk adjusted returns.

If we look at the 10% in HFEA and the other 10% that we are moving from (assuming) VTI to modified HFEA:

Originally 10% HFEA + 10% VTI = 132.5/67.5 stock/LTT for that 20% of your portfolio (ignoring the other 80%)

New 20% in modified HFEA = 135/165 stock/ITT (again ignoring the other 80% of your portfolio)

Let's run the PV for that 20%. The red line is 20% 'modified' HFEA. The blue line is 10% HFEA + 10% VTI. The red line has much higher CAGR and a lower max-drawdown. 'Modified' HFEA can be implemented with TYD or TYA (LETFs), or with futures contracts.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
What actual vehicles apart from futures would you propose using to accomplish that? Thanks
FIrst choice would be futures obviously for lowest cost, but UPRO + TYD or TYA I think is perfectly acceptable - if you are comfortable with the management of those funds.

Another option would be to do a box-spread loan for the equity portion + TYD or TYA for the bond portion.
I don't particularly favor TYD as AUM is tiny. TYA is 1 month old.

Any other suggestions? Say 55% UPRO then how do we get 45% for the bonds? If we used futures which would you buy and how do you calculate the matching leverage for say 2x?
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

perfectuncertainty wrote: Sun Oct 17, 2021 1:18 pm
skierincolorado wrote: Sun Oct 17, 2021 11:38 am
perfectuncertainty wrote: Sun Oct 17, 2021 11:15 am
skierincolorado wrote: Fri Oct 15, 2021 8:59 am
TheDoctor91 wrote: Fri Oct 15, 2021 3:12 am

How?
Instead of doing 10% of net worth in HFEA which is 165/135 stock/LTT, do 20% of one's portfolio in 135/165 stock/ITT. The latter portfolio has higher risk adjusted returns.

If we look at the 10% in HFEA and the other 10% that we are moving from (assuming) VTI to modified HFEA:

Originally 10% HFEA + 10% VTI = 132.5/67.5 stock/LTT for that 20% of your portfolio (ignoring the other 80%)

New 20% in modified HFEA = 135/165 stock/ITT (again ignoring the other 80% of your portfolio)

Let's run the PV for that 20%. The red line is 20% 'modified' HFEA. The blue line is 10% HFEA + 10% VTI. The red line has much higher CAGR and a lower max-drawdown. 'Modified' HFEA can be implemented with TYD or TYA (LETFs), or with futures contracts.

https://www.portfoliovisualizer.com/bac ... on4_2=-200
What actual vehicles apart from futures would you propose using to accomplish that? Thanks
FIrst choice would be futures obviously for lowest cost, but UPRO + TYD or TYA I think is perfectly acceptable - if you are comfortable with the management of those funds.

Another option would be to do a box-spread loan for the equity portion + TYD or TYA for the bond portion.
I don't particularly favor TYD as AUM is tiny. TYA is 1 month old.

Any other suggestions? Say 55% UPRO then how do we get 45% for the bonds? If we used futures which would you buy and how do you calculate the matching leverage for say 2x?
I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:

before rebalance: 12.5k UPRO, 16.5k VGIT, 1 ZF, 20k cash - equity is 49k, stock is 37.5k, bonds are still near target

after rebalance: 24.5k UPRO, 14.5k VGIT, 1 ZF, 10k cash

After you go through some examples it becomes pretty easy to maintain a target AA for net worths above 40-50k. Even for net worths as low as 30k, you can maintain a target AA, if you are targeting something like 130/200 stocks/ITT.
Last edited by skierincolorado on Sun Oct 17, 2021 3:06 pm, edited 1 time in total.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by cflannagan »

skierincolorado wrote: Sun Oct 17, 2021 2:05 pm
I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:

before rebalance: 12.5k UPRO, 16.5k VGIT, 1 ZF, 20k cash - equity is 49k, stock is 37.5k, bonds are still near target

after rebalance: 24.5k UPRO, 14.5k VGIT, 1 ZF, 10k cash

After you go through some examples it becomes pretty easy to maintain a target AA for equities above 40-50k. Even for equities as low as 30k, you can maintain a target AA, if you are targeting something like 130/200 stocks/ITT.
This seems intriguing but I am having a bit of trouble following your rebalancing examples. Before I ask any questions, I was wondering if you have previously made a post/thread elsewhere that goes into more complete details how you would maintain the target AA using ZN/ZF futures? If yes, I could go check that out.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

cflannagan wrote: Sun Oct 17, 2021 2:47 pm
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm
I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:

before rebalance: 12.5k UPRO, 16.5k VGIT, 1 ZF, 20k cash - equity is 49k, stock is 37.5k, bonds are still near target

after rebalance: 24.5k UPRO, 14.5k VGIT, 1 ZF, 10k cash

After you go through some examples it becomes pretty easy to maintain a target AA for equities above 40-50k. Even for equities as low as 30k, you can maintain a target AA, if you are targeting something like 130/200 stocks/ITT.
This seems intriguing but I am having a bit of trouble following your rebalancing examples. Before I ask any questions, I was wondering if you have previously made a post/thread elsewhere that goes into more complete details how you would maintain the target AA using ZN/ZF futures? If yes, I could go check that out.
Yep this thread: viewtopic.php?f=10&t=357281

some more examples in there. You should be able to create a balanced portfolio of stocks/ITT with as little as 40k of money to work with, using ZF and avoiding TYD/TYA.

For amounts under 40k, would probably need to use TYD or TYA.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

skierincolorado wrote: Sun Oct 17, 2021 2:05 pm I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)
OK so far so good.
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:
What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

typical.investor wrote: Sun Oct 17, 2021 6:59 pm
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)
OK so far so good.
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:
What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can. In your example, if UPRO went down, we would have plent of CASH and VGIT to sell to buy more UPRO. Under no circumstance should to total stock allocation fall below 150% (except between rebalancing periods)

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash

Next 5% drop:

20k UPRO, 6k VTI, 5.7k VGIT, 100k ZF, 7k cash (39k equity; target 59k stock, 94k bonds)

rebalance:

15k UPRO, 14k VTI, 100k ZF, 10k cash (slightly overtarget on bonds)


Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.

I can provide another example where UPRO goes down and bonds do not go up if you like. We will be able to rebalance back into UPRO without problem.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

skierincolorado wrote: Sun Oct 17, 2021 8:43 pm
typical.investor wrote: Sun Oct 17, 2021 6:59 pm
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)
OK so far so good.
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:
What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash
I don't think you are following my example.

If the market were flat (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing. As the loss in this case was caused by volatility and not market returns, you would want to increase your exposure to UPRO back to $25k which is where is would be for 3X market returns.
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.
Sure you can always rebalance back to 150/150 AA. Of course, but if you don't rebalance your 3X equities back to (or closer to) 3X market returns, you could suffer volatility loss over time. You example give $66k of stock exposure. Yet anyone holding VTI from the start would be at $25k since returns for the market were zero. You are no longer 3X the market in equity exposure and your rebalancing didn't reset that. So you can have volatility loss.

Simply rebalancing your AA to 150/150 doesn't prevent volatility from shrinking your equity exposure relative to market returns. What you'd want to do is put $5k cash into UPRO.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

typical.investor wrote: Sun Oct 17, 2021 8:55 pm
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm
typical.investor wrote: Sun Oct 17, 2021 6:59 pm
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)
OK so far so good.
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:
What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash
I don't think you are following my example.

If the market were flat (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing. As the loss in this case was caused by volatility and not market returns, you would want to increase your exposure to UPRO back to $25k which is where is would be for 3X market returns.
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.
Sure you can always rebalance back to 150/150 AA. Of course, but if you don't rebalance your 3X equities back to (or closer to) 3X market returns, you could suffer volatility loss over time. You example give $66k of stock exposure. Yet anyone holding VTI from the start would be at $25k since returns for the market were zero. You are no longer 3X the market in equity exposure and your rebalancing didn't reset that. So you can have volatility loss.

Simply rebalancing your AA to 150/150 doesn't prevent volatility from shrinking your equity exposure relative to market returns. What you'd want to do is put $5k cash into UPRO.
What you are describing is an identical problem with original HFEA as well. If it is part of one's plan, one could certainly move cash and bonds into UPRO to fight volatility decay even during periods when bonds have flat or negative returns. Whether original HFEA, or modified, this will require sacrificing the bond portion of the portfolio, if bonds are not providing the expected negative correlation.

Personally, I would chose to follow the backtest and maintain the target AA - as the backtest does.
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

skierincolorado wrote: Sun Oct 17, 2021 9:12 pm
typical.investor wrote: Sun Oct 17, 2021 8:55 pm
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm
typical.investor wrote: Sun Oct 17, 2021 6:59 pm
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm I buy ZF and ZN futures. But they are roughly 100k exposure per contract. Could complement with a bond fund like VGIT. You'd need at least 40k to be using ZF futures. Even at 40k, you'd be 250% AA in bonds. An examples with possible quarterly rebalance scenarios:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)
OK so far so good.
skierincolorado wrote: Sun Oct 17, 2021 2:05 pm quarterly rebalance after 50% drop in URPO, 15% bump for 8 year bonds -> 10% bump for 5 year bonds:
What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash
I don't think you are following my example.

If the market were flat (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing. As the loss in this case was caused by volatility and not market returns, you would want to increase your exposure to UPRO back to $25k which is where is would be for 3X market returns.
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.
Sure you can always rebalance back to 150/150 AA. Of course, but if you don't rebalance your 3X equities back to (or closer to) 3X market returns, you could suffer volatility loss over time. You example give $66k of stock exposure. Yet anyone holding VTI from the start would be at $25k since returns for the market were zero. You are no longer 3X the market in equity exposure and your rebalancing didn't reset that. So you can have volatility loss.

Simply rebalancing your AA to 150/150 doesn't prevent volatility from shrinking your equity exposure relative to market returns. What you'd want to do is put $5k cash into UPRO.
What you are describing is an identical problem with original HFEA as well. If it is part of one's plan, one could certainly move cash and bonds into UPRO to fight volatility decay even during periods when bonds have flat or negative returns.
Yes, it is true for the original HFEA too. That is a big reason why it's not suggested to do it with with all your money.
skierincolorado wrote: Sun Oct 17, 2021 9:12 pm Whether original HFEA, or modified, this will require sacrificing the bond portion of the portfolio, if bonds are not providing the expected negative correlation.
No, no, no and no. At least not for most HFEA investors should they so choose. Why in the above example would you sell leveraged bonds after they have suffered a NAV loss? That defies bond 101. Try to hold until they recover at the duration (or sooner if rates come down).

Ignore bonds for a second and view it if HFEA is only a slice of your portfolio.

Say for equities you had:
$25,000 UPRO (3X LETF)
$25,000 VOO
---------------------
=$100,000 equity exposure

And assume we hit the HFEA kryptonite of sideways returns, highish volatility and no chance to rebalance from bonds due to rate hikes as in the example above where the LEFT fund loses 17.1% or so due to sideways equity movement (0% return) and volatility.

If, for example, the $25k of UPRO (3X LETF) is down to $20,725 due to the 17.1% volatility loss, you can rebalance $6412.50 from VOO and you will still have $100,000 exposure in equities [(20,725 +6412.5) *3 +(25,000-6412.50)*1].

You will have neither sacrificed bonds at an inopportune time (NAV loss due to rising rates), nor have you reduced your equity exposure solely due to market volatility.

That's my suggestion anyway. Of course if things go sideways long enough, that $25,000 in VOO isn't going to be enough. I only used $25,000 to keep the example simple.

I am generally keeping my HFEA allocation separate, but would be willing to use VTI holdings in the kryptonite case if UPRO is badly underperforming 3X the market and it's not possible to effectively rebalance from bonds.

Perhaps that's why I don't see ITT as being so advantageous to LTT. They aren't my only source to rebalance from if for instance we hit a few years of rising rates.
skierincolorado
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by skierincolorado »

typical.investor wrote: Sun Oct 17, 2021 9:56 pm
skierincolorado wrote: Sun Oct 17, 2021 9:12 pm
typical.investor wrote: Sun Oct 17, 2021 8:55 pm
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm
typical.investor wrote: Sun Oct 17, 2021 6:59 pm

OK so far so good.



What about a flat market with rising rates?

For instance, in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

And if rates go the other direction (due to inflation), you could see a 15% loss in 8 year bonds or 10% in 5 year bonds.

You will be selling (at least some of) the VGIT and using cash to maintain the ZF contract or maybe all of it if the situation continues a couple of years.

Ideally you'd want to rebalance into the 3X equities (as there will be an opportunity in that volatile market) when they are low. Otherwise you will might just be stuck with the volatility loss [unless a bull market in the future makes up for it with a volatility boost - but there is no guarantee at all of that].

So will cashflows from new contributions make it possible? In terms of risk management, one shouldn't only plan for the ideal case (stock loss will be offset by bond gains).

I'm planning for HFEA to work out, but I am also planning to be able to add money as necessary and that is why I limit it to only part of my portfolio.

skierincolorado, I know you believe the volatility effect will wash out over time due to the reputed magic of hedge fund investors necessitating it so, but I do not believe that to necessarily be the case especially over shorter terms and especially if you are so leveraged that you won't be able to come up with the necessary cash flows when equities do poorly and the daily leverage gets reset (which requires you to add exposure or risk underperforming 3X the index and maybe even realizing a loss in a flat or mildly upward market).

Not saying your plan is bad, only that you should be prepared mentally for this case too.
Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash
I don't think you are following my example.

If the market were flat (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing. As the loss in this case was caused by volatility and not market returns, you would want to increase your exposure to UPRO back to $25k which is where is would be for 3X market returns.
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.
Sure you can always rebalance back to 150/150 AA. Of course, but if you don't rebalance your 3X equities back to (or closer to) 3X market returns, you could suffer volatility loss over time. You example give $66k of stock exposure. Yet anyone holding VTI from the start would be at $25k since returns for the market were zero. You are no longer 3X the market in equity exposure and your rebalancing didn't reset that. So you can have volatility loss.

Simply rebalancing your AA to 150/150 doesn't prevent volatility from shrinking your equity exposure relative to market returns. What you'd want to do is put $5k cash into UPRO.
What you are describing is an identical problem with original HFEA as well. If it is part of one's plan, one could certainly move cash and bonds into UPRO to fight volatility decay even during periods when bonds have flat or negative returns.
Yes, it is true for the original HFEA too. That is a big reason why it's not suggested to do it with with all your money.
skierincolorado wrote: Sun Oct 17, 2021 9:12 pm Whether original HFEA, or modified, this will require sacrificing the bond portion of the portfolio, if bonds are not providing the expected negative correlation.
No, no, no and no. At least not for most HFEA investors should they so choose. Why in the above example would you sell leveraged bonds after they have suffered a NAV loss? That defies bond 101. Try to hold until they recover at the duration (or sooner if rates come down).

Ignore bonds for a second and view it if HFEA is only a slice of your portfolio.

Say for equities you had:
$25,000 UPRO (3X LETF)
$25,000 VOO
---------------------
=$100,000 equity exposure

And assume we hit the HFEA kryptonite of sideways returns, highish volatility and no chance to rebalance from bonds due to rate hikes as in the example above where the LEFT fund loses 17.1% or so due to sideways equity movement (0% return) and volatility.

If, for example, the $25k of UPRO (3X LETF) is down to $20,725 due to the 17.1% volatility loss, you can rebalance $6412.50 from VOO and you will still have $100,000 exposure in equities [(20,725 +6412.5) *3 +(25,000-6412.50)*1].

You will have neither sacrificed bonds at an inopportune time (NAV loss due to rising rates), nor have you reduced your equity exposure solely due to market volatility.

That's my suggestion anyway. Of course if things go sideways long enough, that $25,000 in VOO isn't going to be enough. I only used $25,000 to keep the example simple.

I am generally keeping my HFEA allocation separate, but would be willing to use VTI holdings in the kryptonite case if UPRO is badly underperforming 3X the market and it's not possible to effectively rebalance from bonds.

Perhaps that's why I don't see ITT as being so advantageous to LTT. They aren't my only source to rebalance from if for instance we hit a few years of rising rates.
Yes this is certainly a possible strategy if you are particularly concerned about volatility decay. Ultimately you will end up moving money from other accoutns to HFEA during periods of volatility decay. If you do not then withdraw the money during periods of low-volatility boost, the money will only flow in one direction. If your HFEA account is small, you may get away with this for a very long time. If the HFEA account is bigger relative to overall nw, you will eventually reduce the safe assets to an acceptably low % of net worth.

So the alternative is to take money out of HFEA during periods of low-volatility boost. This is essentially a market timing strategy of increasing our oveall leverage (by increasing the % of nw allocated to leveraged strategies) when markets go down. I've backtested such strategies, and they are of modest benefit. But since volatility decay has not been much of an issue over the last 30+ years, the benefit is small. You eliminate volatility drag, but you also eliminate low-volatility boost. So the effect is nearly a wash. If you only eliminate volatility drag (by increasing leverage when markets go down), but do not eliminate low-volatility boost (by decreasing leverage when markets go up), you just end up becoming more leveraged over time, likely beyond desired target/tolerable leverage.

Back to the ITT vs LTT. The benefit isn't from improved rebalancing - which is roughly the same. The benefit is simply that ITT go up more.
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typical.investor
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by typical.investor »

skierincolorado wrote: Mon Oct 18, 2021 12:26 pm
typical.investor wrote: Sun Oct 17, 2021 9:56 pm
skierincolorado wrote: Sun Oct 17, 2021 9:12 pm
typical.investor wrote: Sun Oct 17, 2021 8:55 pm
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm

Absolutely, ideally we should be able to rebalance back to our target AA if one goes down and the other does not go up (or if both go down). And we can:

50k equity equivalent to 50/50 UPRO/TYD - targeting 75k stocks and 75k 8-yr bonds, or 120k 5 year bonds

initial: 25k UPRO, 15k VGIT, 1 ZF, 10k cash - (75k stocks, 115k 5-yr bonds equivalent to ~75k 8 year bonds)

let's simulate 5 year bonds doing two consecutive drawdowns of 5% (~5% is the max-drawdown in the last 10 years)

after first 5%:

25k UPRO, 14.25k VGIT, 1 ZF, 5k cash. equity is 44.25k. To maintain our initial 240% AA in 5-yr bonds, we want 44.25*2.4 = 106k in bonds. And we want 44.25*1.5 in stock = 66k

Thus we rebalance to:

20k UPRO, 6k VTI, 6k VGIT, 100k ZF, 12k cash
I don't think you are following my example.

If the market were flat (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing. As the loss in this case was caused by volatility and not market returns, you would want to increase your exposure to UPRO back to $25k which is where is would be for 3X market returns.
skierincolorado wrote: Sun Oct 17, 2021 8:43 pm Beginning with 50k of equity, and a 150/150 stock/bond AA, one should be able to rebalance back to the target 150/150 AA no matter what the market does. If both bonds and stocks do poorly, you might end up a little over-target on bonds because the minimum increment for ZF is 100k. Other than that though, the target AA can always be maintained - and most importantly the stock allocation can always be rebalanced to 150%.
Sure you can always rebalance back to 150/150 AA. Of course, but if you don't rebalance your 3X equities back to (or closer to) 3X market returns, you could suffer volatility loss over time. You example give $66k of stock exposure. Yet anyone holding VTI from the start would be at $25k since returns for the market were zero. You are no longer 3X the market in equity exposure and your rebalancing didn't reset that. So you can have volatility loss.

Simply rebalancing your AA to 150/150 doesn't prevent volatility from shrinking your equity exposure relative to market returns. What you'd want to do is put $5k cash into UPRO.
What you are describing is an identical problem with original HFEA as well. If it is part of one's plan, one could certainly move cash and bonds into UPRO to fight volatility decay even during periods when bonds have flat or negative returns.
Yes, it is true for the original HFEA too. That is a big reason why it's not suggested to do it with with all your money.
skierincolorado wrote: Sun Oct 17, 2021 9:12 pm Whether original HFEA, or modified, this will require sacrificing the bond portion of the portfolio, if bonds are not providing the expected negative correlation.
No, no, no and no. At least not for most HFEA investors should they so choose. Why in the above example would you sell leveraged bonds after they have suffered a NAV loss? That defies bond 101. Try to hold until they recover at the duration (or sooner if rates come down).

Ignore bonds for a second and view it if HFEA is only a slice of your portfolio.

Say for equities you had:
$25,000 UPRO (3X LETF)
$25,000 VOO
---------------------
=$100,000 equity exposure

And assume we hit the HFEA kryptonite of sideways returns, highish volatility and no chance to rebalance from bonds due to rate hikes as in the example above where the LEFT fund loses 17.1% or so due to sideways equity movement (0% return) and volatility.

If, for example, the $25k of UPRO (3X LETF) is down to $20,725 due to the 17.1% volatility loss, you can rebalance $6412.50 from VOO and you will still have $100,000 exposure in equities [(20,725 +6412.5) *3 +(25,000-6412.50)*1].

You will have neither sacrificed bonds at an inopportune time (NAV loss due to rising rates), nor have you reduced your equity exposure solely due to market volatility.

That's my suggestion anyway. Of course if things go sideways long enough, that $25,000 in VOO isn't going to be enough. I only used $25,000 to keep the example simple.

I am generally keeping my HFEA allocation separate, but would be willing to use VTI holdings in the kryptonite case if UPRO is badly underperforming 3X the market and it's not possible to effectively rebalance from bonds.

Perhaps that's why I don't see ITT as being so advantageous to LTT. They aren't my only source to rebalance from if for instance we hit a few years of rising rates.
Yes this is certainly a possible strategy if you are particularly concerned about volatility decay. Ultimately you will end up moving money from other accoutns to HFEA during periods of volatility decay. If you do not then withdraw the money during periods of low-volatility boost, the money will only flow in one direction. If your HFEA account is small, you may get away with this for a very long time. If the HFEA account is bigger relative to overall nw, you will eventually reduce the safe assets to an acceptably low % of net worth.

So the alternative is to take money out of HFEA during periods of low-volatility boost. This is essentially a market timing strategy of increasing our oveall leverage (by increasing the % of nw allocated to leveraged strategies) when markets go down. I've backtested such strategies, and they are of modest benefit. But since volatility decay has not been much of an issue over the last 30+ years, the benefit is small. You eliminate volatility drag, but you also eliminate low-volatility boost. So the effect is nearly a wash. If you only eliminate volatility drag (by increasing leverage when markets go down), but do not eliminate low-volatility boost (by decreasing leverage when markets go up), you just end up becoming more leveraged over time, likely beyond desired target/tolerable leverage.
Rates have been dramatically falling over the last 30 years. No doubt this is having a big effect.

The Simba LETF backtesting spreadsheet shows that from 1980 -2015, 100% 3X S&P500 isn't much different from 100% S&P500 at 11.49% CAGR vs 11.41%.

Are you saying there was no volatility effect apparent in that time?

Over that same period, HFEA (55% 3X S&P500 45% 3X LTT) had a CAGR of 18.55%. LTTs themselves only returned 12.02%, so obviously the rebalancing was helping to overcome the volatility effect.

The question is, in a stagflation or even flat rate environment where treasuries aren't providing the same boost, where treasuries may be suffering rate hike induced NAV losses and where equities are flat; will the volatility effect be so benign?

Due to falling rates, the last 30 years particularly had opportunity to rebalance from treasuries into equities when necessary, and rebalancing into the LEFT when it's fallen is what offsets the negative effect of volatility.

If 3X S&P500 shows no volatility effect without rebalancing, what explains the 1980 -2015 returns [where leveraged returns were quite similar to non-leveraged as opposed to be a multiple of them]? 1980-2018 (when the latest Simba sheet ends) is similar at 12.04% for 3X S&P500 vs 11.24% for S&P500.

Just because we haven't seen a negative volatility effect in the past 30 years, doesn't mean we won't see one if markets go sideways for a time and inflation induced losses means we aren't able to reset our leverage from appreciated treasuries.
adamhg
Posts: 218
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by adamhg »

Inspired by a side conversation with skier in the mHFEA thread, I started a new play account with SHY 82C LEAPs which currently have an approximate 20.8x leverage ratio. Running it 40% UPRO 60% SHY LEAPs for an effective 120% SPY / 1200% STT allocation. Will track progress here

Start date: 11/9/21
Approach: Fixed allocation - 40/60 UPRO/SHY LEAPs
Rebalancing frequency: Quarterly
Return (total / YTD): 0%
Initial contribution: $23k
Portfolio location: TDA

https://www.portfoliovisualizer.com/bac ... 10_3=-1248
jarjarM
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Joined: Mon Jul 16, 2018 1:21 pm

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by jarjarM »

adamhg wrote: Tue Nov 09, 2021 5:11 pm Inspired by a side conversation with skier in the mHFEA thread, I started a new play account with SHY 82C LEAPs which currently have an approximate 20.8x leverage ratio. Running it 40% UPRO 60% SHY LEAPs for an effective 120% SPY / 1200% STT allocation. Will track progress here

Start date: 11/9/21
Approach: Fixed allocation - 40/60 UPRO/SHY LEAPs
Rebalancing frequency: Quarterly
Return (total / YTD): 0%
Initial contribution: $23k
Portfolio location: TDA

https://www.portfoliovisualizer.com/bac ... 10_3=-1248
Thanks for sharing, I'll be watching with some interest as STT definitely plays better with inflation than LTT.
456M
Posts: 144
Joined: Tue Mar 23, 2021 11:40 am

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by 456M »

Figured I'd add myself to the list here since it's been exactly 3 months since I started this journey

Start date: 8/25/21
Approach: Fixed allocation - 55% UPRO / 45% TMF
Rebalancing frequency: Quarterly (First rebalance will be in January 2022)
Initial contribution: $10,028 on 25th August 2021
Second contribution: $6,900 on 29th September 2021
Return (total): Initial contribution: 5.7% Second contribution: 12.4%
Additional contributions: Adding quarterly to rebalance ratio till allocation reaches 10% of invested assets.
Martzee
Posts: 10
Joined: Fri Nov 26, 2021 3:48 pm

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Martzee »

Start date: 11/27/21
Approach: Variable allocation* - 45/55 SPXL/TMF
Rebalancing frequency: Quarterly*
Return (total / YTD): 0%/0%
Initial contribution: 15% of portfolio Net-Liq (~ $15k)
Portfolio location: TastyWorks

*My initial allocation is 45 SPXL / 55 TMF.
When the market closes below 50-day MA, I adjust allocation to 40 SPXL / 60 TMF
When the market closes below 200-day MA, I adjust allocation to 0 SPXL / 100 TMF
When the market closes 20% or more below ATH or 200-day MA, I change the allocation to 100 SPXL / 0 TMF
When the market closes above 200-day MA, I change the allocation to 45 SPXL / 55 TMF
User avatar
Afrofreak
Posts: 223
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Location: Ontario, Canada

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Afrofreak »

Martzee wrote: Sat Nov 27, 2021 11:53 am Start date: 11/27/21
Approach: Variable allocation* - 45/55 SPXL/TMF
Rebalancing frequency: Quarterly*
Return (total / YTD): 0%/0%
Initial contribution: 15% of portfolio Net-Liq (~ $15k)
Portfolio location: TastyWorks

*My initial allocation is 45 SPXL / 55 TMF.
When the market closes below 50-day MA, I adjust allocation to 40 SPXL / 60 TMF
When the market closes below 200-day MA, I adjust allocation to 0 SPXL / 100 TMF
When the market closes 20% or more below ATH or 200-day MA, I change the allocation to 100 SPXL / 0 TMF
When the market closes above 200-day MA, I change the allocation to 45 SPXL / 55 TMF
I would be extremely cautious messing around with technical indicators to determine the allocation of your portfolio. Not only is it not grounded in sound investing principles, but also you are going to incur hefty tax liabilities if you are doing this outside a non-reg account.
Martzee
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Martzee »

I would be extremely cautious messing around with technical indicators to determine the allocation of your portfolio. Not only is it not grounded in sound investing principles, but also you are going to incur hefty tax liabilities if you are doing this outside a non-reg account.
I trade as an entity, so I think, I can handle the taxation. Also, the indicators do not happen too often. The quarterly rebalancing will happen more often than re-allocating based on the MA. In choppy markets around the MAs, I will keep allocation at the level the market is in. But will see how that goes. I will be posting my results.
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Afrofreak
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Location: Ontario, Canada

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by Afrofreak »

Martzee wrote: Sat Nov 27, 2021 8:06 pm
I would be extremely cautious messing around with technical indicators to determine the allocation of your portfolio. Not only is it not grounded in sound investing principles, but also you are going to incur hefty tax liabilities if you are doing this outside a non-reg account.
I trade as an entity, so I think, I can handle the taxation. Also, the indicators do not happen too often. The quarterly rebalancing will happen more often than re-allocating based on the MA. In choppy markets around the MAs, I will keep allocation at the level the market is in. But will see how that goes. I will be posting my results.
That may be true that you would be rebalancing less frequently using MAs, but when you rebalance, you're rebalancing everything. With quarterly rebalancing, you're rebalancing 1-5%, 10% tops. Good luck.
ocrtech
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by ocrtech »

Start date: 4/12/2019
Approach: Inverse Volatility based on exponential weighting of 60 day lookback. UPRO guardrails from 25% to 65%.
Rebalancing frequency: Monthly
Contribution: Dollar Cost Average on a monthly basis from Apr - Sep for a total investment of $68,560
Return (total): $151,113
Return %: 120%

Comparing this investment against a similar amount invested in the S&P500 currently shows a 28% higher return.

Image
keith6014
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by keith6014 »

ocrtech wrote: Wed Dec 01, 2021 8:46 am Start date: 4/12/2019
Approach: Inverse Volatility based on exponential weighting of 60 day lookback. UPRO guardrails from 25% to 65%.
Rebalancing frequency: Monthly
Contribution: Dollar Cost Average on a monthly basis from Apr - Sep for a total investment of $68,560
Return (total): $151,113
Return %: 120%

Comparing this investment against a similar amount invested in the S&P500 currently shows a 28% higher return.

Image
Do you do the weighted avg on in the index or LETF?
ocrtech
Posts: 59
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by ocrtech »

keith6014 wrote: Wed Dec 01, 2021 10:22 am Do you do the weighted avg on in the index or LETF?
I do it on the LETFs.
456M
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Joined: Tue Mar 23, 2021 11:40 am

Re: Riding HEDGEFUNDIE’s excellent adventure

Post by 456M »

My 55/45 UPRO/TMF allocation had drifted to 64/36 and now thanks to the market pullback it's back to 55/45. This self-balancing feature is great :D
bgf
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by bgf »

so since i started this recently, i've had the urge to rebalance twice already. the first time about a week ago, and then this afternoon. i figure if i can 'bank' a few percentage points into UPRO on these unusually volatile down days where TMF is doing its job, then that 'combats' the 'volatility decay' everyone discusses. it puts me back on the 50/50 allocation which is my plan, and potentially sets me up for a better haul when/if the SP500 rebounds.

anyone else have this issue? how detrimental to the strategy could it be? i know there has been lots of backtesting and generally quarterly rebalancing is accepted, and thats my plan. guess i didn't stick with it for very long!

so far this is outperforming my benchmark VT by a few percentage points already. TMF doing its job!
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
DMoogle
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by DMoogle »

bgf wrote: Fri Dec 03, 2021 1:18 pm so since i started this recently, i've had the urge to rebalance twice already. the first time about a week ago, and then this afternoon. i figure if i can 'bank' a few percentage points into UPRO on these unusually volatile down days where TMF is doing its job, then that 'combats' the 'volatility decay' everyone discusses. it puts me back on the 50/50 allocation which is my plan, and potentially sets me up for a better haul when/if the SP500 rebounds.

anyone else have this issue? how detrimental to the strategy could it be? i know there has been lots of backtesting and generally quarterly rebalancing is accepted, and thats my plan. guess i didn't stick with it for very long!

so far this is outperforming my benchmark VT by a few percentage points already. TMF doing its job!
If the volatility is causing you urges to do something without a rational basis, then I would say HFEA probably isn't for you.

How frequently you rebalance isn't going to make a large impact on the volatility decay... not compared to the fact that both of these ETFs rebalance themselves daily. As for how harmful doing an off-cycle rebalancing schedule is to the whole strategy... hard to say, but probably doesn't make THAT big a difference either way.
bgf
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Re: Riding HEDGEFUNDIE’s excellent adventure

Post by bgf »

DMoogle wrote: Fri Dec 03, 2021 1:23 pm
bgf wrote: Fri Dec 03, 2021 1:18 pm so since i started this recently, i've had the urge to rebalance twice already. the first time about a week ago, and then this afternoon. i figure if i can 'bank' a few percentage points into UPRO on these unusually volatile down days where TMF is doing its job, then that 'combats' the 'volatility decay' everyone discusses. it puts me back on the 50/50 allocation which is my plan, and potentially sets me up for a better haul when/if the SP500 rebounds.

anyone else have this issue? how detrimental to the strategy could it be? i know there has been lots of backtesting and generally quarterly rebalancing is accepted, and thats my plan. guess i didn't stick with it for very long!

so far this is outperforming my benchmark VT by a few percentage points already. TMF doing its job!
If the volatility is causing you urges to do something without a rational basis, then I would say HFEA probably isn't for you.

How frequently you rebalance isn't going to make a large impact on the volatility decay... not compared to the fact that both of these ETFs rebalance themselves daily. As for how harmful doing an off-cycle rebalancing schedule is to the whole strategy... hard to say, but probably doesn't make THAT big a difference either way.
How is rebalancing not founded on a rational basis?

Rebalancing is at the heart of the entire strategy, is it not? We can data mine and back test over which rebalancing strategy is the best, bands, frequent, infrequent, etc. but at the end of the day, this strategy won't work over the long term without rebalancing.

if the choice is between never rebalancing, and rebalancing weekly, i dont think anyone would argue the superior strategy is to rebalance weekly.

or am i fundamentally missing something?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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