Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

klaus14 wrote: Tue Nov 16, 2021 8:18 pm
Lock wrote: Tue Nov 16, 2021 10:29 am
klaus14 wrote: Mon Nov 15, 2021 4:45 pm
skierincolorado wrote: Fri Sep 10, 2021 2:39 pm In case anyone missed it, this is my "final" estimate.

.3% ITT
.4% LTT
4.5% domestic stock
5% international stock

The efficient frontier is: 34/22/44 domestic stock / intl stock / ITT

https://www.portfoliovisualizer.com/eff ... ints=false

***This is extremely sensitive to asssumptions. I suggest simply using the historical efficient frontier.***

I sold all my bond futures today.

Reasoning:
I am not confident that backtests apply to today. I was holding $1M worth of /ZN. ZN is close to 7 years maturity. The real yield on 7 years treasury is -1.5%. This is the median of return expectation for the 7 year time frame. So I'll loose (real) ~$15k (plus futures financing cost minus roll down yield)* every year on the average case. Notice that i am not saying rates will go up or down. This is just the mean expectation. Yes negative correlation with equities may help in the event of a recession. However, unlike past, now this hedge has significant costs compared to potential benefit (which is lower since real yields are at the lowest - less room to go down). I couldn't justify this given my investment horizon is very long (I am mid 30s)

*skierincolorado above did more complex math including roll down yield and forward rate estimates. Using that figure, nominal return expectation: 0.3% ITT => real: -2.8% (using breakeven). And quote is from Sept 7 and real rates are worse today.

So now my only bond holdings are: I Bonds, EE Bonds, an old CD yielding 2.75%
I am planning to buy /ZN when 7 years real yield is positive again.

I wish best of luck to everyone in this thread. I learned a lot here.
Why not just go short (i.e. sell contracts)? YTD the stock/bond correlation has been positive so you can re-create a negative correlation asset.

Disclaimer: I've been running a risk parity portfolio for about 3 years and this year I sold ZN contracts for the first time.
That would only make sense if nominal return expectation was negative AND correlation to equities is positive.
I don't know how to do the math myself unfortunately but skierincolorado posted +0.3 or +0.4 above which is too small for me to justify a position but still positive.
I should probably admit some error in that calculation since it relied on forward rates which include an unknown term premium. Actual market expected future rates could be lower or higher than what I used depending on whether the term premium is positive or negative respectively.

Ultimately I think the case for bonds rests mostly on a century of positive returns and weak correlations with stocks. There is some reason to believe demand for capital is much lower than it was historically, but ultimately I think we should expect positive returns from bond carry. Instances of sustained completely flat or inverted yield curves I think are rare or unheard of globally, although they are certainly a lot flatter than they used to be.

This market is in the many tens of trillions so we will be in good company
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Tue Nov 16, 2021 9:03 pm
comeinvest wrote: Tue Nov 16, 2021 7:48 pm
skierincolorado wrote: Tue Nov 16, 2021 3:36 pm I edited to include the fact that the loss on the ZB in my 2.5% widening was nearly as large on all those ZFs in your 2.5% inversioning (I won't even call that a flattening haha so I am making up a word). This is what I mean by he has equal risk at each duration.

Ignoring the fact that a 2.5% widening is probably more likely than a 2.5% inversioning, we still should tilt towards the lower duration because the roll and carry is better. If there is no flattening or widening, the ZF wins substantially. Only if we believe flattening/inversioning will be rapid at high probability would we want equal risk. That's the breakeven. Otherwise we tilt to the one with the better roll and carry and historical returns.

If widening/flattening was a normal distribution centered at zero... we would pick ZF and zero TN or ZB. It's not centered at zero though.. slight flattening is probably a bit more likely than widening. But not enough to push us into equal risk in ZB.

How about a more realistic scenario where 4.5 year rates increase 3% and 11.5 year rates increase 2.5%. The yield curve would still be inverted. But one would of course have been much better off in the shorter durations 1) because we can have less duration risk (I'd replace each ZB with 1.5 ZFs) and 2) unless this happened overnight we'd be getting the much better roll and carry of the shorter durations every single day that interest rates didn't rise
But what is so bad about equal risk in ZF as in ZB. It means your allocation would be agnostic to 5y12y steepening or flattening. All the while you would be collecting the higher carry returns from your ZF with 70%+ of your treasury portfolio (> 75% in DMoogle's proposal). If we assume a 0.75% risk-adjusted outperformance of ZF vs ZB, you would be giving up 0.75% * 0.25 = 0.1875% CAGR for the benefit of being shielded from 5y12y flattening risk. (I got the 0.75% by eyeballing the Simplify charts, and reducing the factor for the higher risk of shorter maturities than strict duration matching would suggest, for compressed yield curve, and for uncertainties around persistence of anomalies.) I get your point and would not argue for or against it, but trying to quantify things. Seems like small return differences for small diversification and risk improvements.

We have to be cognizant that several return and risk factors are at play - duration, carry, steepening, flattening -, and everything is probabilistic and sensitive to input assumptions.
Good math. But I view that as a lot of cagr especially when levered 2x to nearly .4%, for a risk I’m not terribly concerned about mitigating. If the 5y12y gets even flatter than it is currently or inverts it’s no big deal the relative outperformance of zb would be quite small. It’s the rising rate scenario that is the real risk for this strategy. And in that scenario I would rather have 1.5x as much zf instead of zb.
I get your point and can follow your rationale.
Not to make a case, but purely for education, I find it instructive to look at rates of comparable countries to understand what "could" happen.
Current 5y15y spreads ca.:

Code: Select all

U.S.		0.6%
Germany		0.5%
Japan		0.36%
Switzerland	0.4%
U.K.		0.44%
Norway		0.1%
Australia	0.7%
Singapore	0.6%
South Korea	0.2%
Looks like with the 5y15y slope we are in line, albeit a bit above average, even compared to countries with a significantly lower level of interest rates.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Tue Nov 16, 2021 9:03 pm Good math. But I view that as a lot of cagr especially when levered 2x to nearly .4%, for a risk I’m not terribly concerned about mitigating. If the 5y12y gets even flatter than it is currently or inverts it’s no big deal the relative outperformance of zb would be quite small. It’s the rising rate scenario that is the real risk for this strategy. And in that scenario I would rather have 1.5x as much zf instead of zb.
B.t.w. I know you prefer rules-based strategies supported by extensive backtesting, and I don't mean to question your long-term strategy in fact I agree with it, but the 3y-5y-7y segment of the yield curve was a straight line 6 months ago (orange line in the chart). How can this possibly go well (in relative terms) for the 3y and 5y in comparison to the 7y ? I struggle a bit with that scenario. Given the straight line, obviously the instant carry of the 7y (ZN) must have been higher 6 months ago than that of the 5y (ZF), both from yield to maturity and from rolldown, even on a per-unit-of-duration basis, if I'm not mistaken. And the instant carry advantage would have stayed that way forever, or until the curve became more convex (logarithmic). When it became more convex, the 5y inevitably lost against the 7y due to becoming more convex.
Would you consider the 5y again with the yield curve of 6 months ago? Any scenario that one could perform better with the 5y than with the 7y with a yield curve like 6 months ago?

Image
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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

comeinvest wrote: Tue Nov 16, 2021 10:56 pm
skierincolorado wrote: Tue Nov 16, 2021 9:03 pm Good math. But I view that as a lot of cagr especially when levered 2x to nearly .4%, for a risk I’m not terribly concerned about mitigating. If the 5y12y gets even flatter than it is currently or inverts it’s no big deal the relative outperformance of zb would be quite small. It’s the rising rate scenario that is the real risk for this strategy. And in that scenario I would rather have 1.5x as much zf instead of zb.
B.t.w. I know you prefer rules-based strategies supported by extensive backtesting, and I don't mean to question your long-term strategy in fact I agree with it, but the 3y-5y-7y segment of the yield curve was a straight line 6 months ago (orange line in the chart). How can this possibly go well (in relative terms) for the 3y and 5y in comparison to the 7y ? I struggle a bit with that scenario. Given the straight line, obviously the instant carry of the 7y (ZN) must have been higher 6 months ago than that of the 5y (ZF), both from yield to maturity and from rolldown, even on a per-unit-of-duration basis, if I'm not mistaken. And the instant carry advantage would have stayed that way forever, or until the curve became more convex (logarithmic). When it became more convex, the 5y inevitably lost against the 7y due to becoming more convex.
Would you consider the 5y again with the yield curve of 6 months ago? Any scenario that one could perform better with the 5y than with the 7y with a yield curve like 6 months ago?

Image
While the dots connecting 3-5-7 are a straight line, the slope at 7 was somewhere between the 5-7 and 7-10 slope (which was less). So there was some convexity between 3 and 7, but not as much as now. I think the carry and roll down were still steepest at ~5 years (whereas now it is at ~3 years). And the spread could have kept widening. For example if the 3y doubled from .2 to .4 and the 7y doubled from .7 to 1.4.... you'd still have a straight curve and hte 3y would have been better to hold in the process. I think the curve was predicting a steepening that never materialized. So yeah I'd want to backtest these kinds of dynamic rules before adopting them.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Tue Nov 16, 2021 11:45 pm While the dots connecting 3-5-7 are a straight line, the slope at 7 was somewhere between the 5-7 and 7-10 slope (which was less). So there was some convexity between 3 and 7, but not as much as now. I think the carry and roll down were still steepest at ~5 years (whereas now it is at ~3 years). And the spread could have kept widening. For example if the 3y doubled from .2 to .4 and the 7y doubled from .7 to 1.4.... you'd still have a straight curve and hte 3y would have been better to hold in the process. I think the curve was predicting a steepening that never materialized. So yeah I'd want to backtest these kinds of dynamic rules before adopting them.
Thanks! Good point about the predicted steepening that might justify straight lines. I'm probably over-analyzing things that in reality are efficiently priced, although I read that occasionally there are anomalies even between treasury maturities. Nevertheless, do you have a source for a more accurate interpolated yield curve to better estimate slope and roll returns?
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Bentonkb
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Bentonkb »

I shifted from LTT to ITT this week and got rid of /ZB in favor of a mix including /ZF and GOVT. GOVT is an unlevered mix of treasuries with an effective duration of 7 years, similar to /ZN. 80% of my bond exposure is /ZF right now.
hdas
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

hhhhhhhh
Last edited by hdas on Tue Nov 23, 2021 12:35 pm, edited 1 time in total.
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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

hdas wrote: Fri Nov 19, 2021 11:33 am
Bentonkb wrote: Fri Nov 19, 2021 9:13 am I shifted from LTT to ITT this week and got rid of /ZB in favor of a mix including /ZF and GOVT. GOVT is an unlevered mix of treasuries with an effective duration of 7 years, similar to /ZN. 80% of my bond exposure is /ZF right now.
Ok, we have now 2 volunteers for the live experiment. As I have mentioned multiple times, I think this is not a good time for the switch, but at least you got in when the spread is around 0.75 instead of 1.5+ for Mr. Skier. Good luck!
While you may not think it is a good idea, it is without evidence until you propose a rules based backtest that is rigorously tested and persistent across time periods. A theoretical explanation for why the market would be inefficient in this case and BAB fail to apply would help as well. I personally would be very interested in either. Certainly if it were possible to go back in time and buy LTT during their periods of outperformance, that would work well. Given the evidence for EMH and BAB and against market timing, and the lack of evidence I have found that bonds can be market timed with great success despite looking, I choose to buy and hold ITT because they outperform LTT on average (some sophisticated strategies do show some modest success, but there's always the chance it's overfitting historical data).

There are at least a dozen or so others on the ITT bandwagon, perhaps you have missed it. Not to mention the hedge funds and pensions that buy large amounts of ITT on leverage. Who do you think is buying the 10+ Trillion ITT market?
Last edited by skierincolorado on Fri Nov 19, 2021 11:45 pm, edited 1 time in total.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Fri Nov 19, 2021 1:14 pm
hdas wrote: Fri Nov 19, 2021 11:33 am
Bentonkb wrote: Fri Nov 19, 2021 9:13 am I shifted from LTT to ITT this week and got rid of /ZB in favor of a mix including /ZF and GOVT. GOVT is an unlevered mix of treasuries with an effective duration of 7 years, similar to /ZN. 80% of my bond exposure is /ZF right now.
Ok, we have now 2 volunteers for the live experiment. As I have mentioned multiple times, I think this is not a good time for the switch, but at least you got in when the spread is around 0.75 instead of 1.5+ for Mr. Skier. Good luck!
While you may not think it is a good idea, it is without evidence until you propose a rules based backtest that is rigorously tested and persistent across time periods. A theoretical explanation for why the market would be inefficient in this case and BAB fail to apply would help as well. I personally would be very interested in either. Certainly if it were possible to go back in time and buy LTT during their periods of outperformance, that would work well. Given the evidence for EMH and BAB and against market timing, and the lack of evidence I have found that bonds can be market timed despite looking, I choose to buy and hold ITT because they outperform LTT on average.

There are at least a dozen or so others on the ITT bandwagon, perhaps you have missed it. Not to mention the hedge funds and pensions that buy large amounts of ITT on leverage. Who do you think is buying the 10+ Trillion ITT market?
I have yet to make up my mind regarding other rigorously tested and persistent yield curve strategies, or sophistications of the static ITT strategy; but the carry strategy according to https://www.efmaefm.org/0EFMAMEETINGS/E ... lpaper.pdf with data from 1985 seems to be the most promising. Another paper: https://spinup-000d1a-wp-offload-media. ... Premia.pdf
Your opinion?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Booogle »

Shouldn't bond convexity make Long term Treasuries superior to Intermediate?

https://portfoliocharts.com/2019/05/27/ ... convexity/
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Booogle wrote: Fri Nov 19, 2021 9:37 pm Shouldn't bond convexity make Long term Treasuries superior to Intermediate?

https://portfoliocharts.com/2019/05/27/ ... convexity/
This is nothing but a theoretical mathematical observation.
To draw any conclusions for real life, you would have to construct a probability space over the underlying price movements.
Easier than that is backtesting over long time periods and extrapolating with reasonable adjustments to reflect the current situation, estimating tail risk, etc., as Skier did.
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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

Booogle wrote: Fri Nov 19, 2021 9:37 pm Shouldn't bond convexity make Long term Treasuries superior to Intermediate?

https://portfoliocharts.com/2019/05/27/ ... convexity/
If the yield curve were linear and rates were falling, sure.

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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

hhhhhhh
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

hhhhhhh
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

For all those implementing this strategy with treasury futures, we're coming up on the time to roll to the March contracts. This will be my first time doing so - posting to hopefully help others and allow anyone to point out my own misconceptions. According to CME's Pace of the Roll User Guide, "in recent history the majority of the open interest rolls during the last 10 business days before the contract month begins." You can see current volume here (for ZF for example). Based on that info, I'm planning to roll all my treasuries future contracts tomorrow 11/22.

To roll the contracts from December to March, I am planning to use a calendar spread order to ensure I sell the December contract and buy March at the same time. Here is a walkthrough of how to do that in TWS, but it is also very intuitive in the mobile app under "Future Spread Combo", which is what I'm planning to use.

Note that the typical roll timing for equities futures is later, eight calendar days before the contract expires. So for December contracts, that is a roll date of 12/9/21.

On a side note, I've seen a lot of questions from people looking to implement some variant of this strategy without (understandably) reading the 17 pages of content in this thread. I think I will start a Google doc to summarize everything so far.
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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

hdas wrote: Sat Nov 20, 2021 12:34 pm
skierincolorado wrote: Fri Nov 19, 2021 1:14 pm While you may not think it is a good idea, it is without evidence until you propose a rules based backtest that is rigorously tested and persistent across time periods.
The fact that you keep asking for this, tell us your level of understanding of time series analysis, and the statistical validation tools. Given this, your second suggestion is more appropriate.
I am not sure what is meant by this, nevertheless all I am asking is for *any* evidence at all of a successful implementation of the strategy you propose. All you have provided so far is that if we cherry pick start and end dates we can find periods where LTT outperform ITT. I am suggesting you propose a criterion for picking start and end dates and then test that criterion rigorously.
hdas wrote: Sat Nov 20, 2021 12:34 pm
skierincolorado wrote: Fri Nov 19, 2021 1:14 pm A theoretical explanation for why the market would be inefficient in this case and BAB fail to apply would help as well. I personally would be very interested in either. Certainly if it were possible to go back in time and buy LTT during their periods of outperformance, that would work well. Given the evidence for EMH and BAB and against market timing, and the lack of evidence I have found that bonds can be market timed with great success despite looking, I choose to buy and hold ITT because they outperform LTT on average (some sophisticated strategies do show some modest success, but there's always the chance it's overfitting historical data).
Hello TERM PREMIUM !!. Why do you ignore this?. Why do you ignore this table?. Did you run the regressions as I suggested for you improve your understanding?

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Again, what is the criterion for this table? There is no doubt if we could go back in time and pick the periods of greatest curve flattening, LTT will oupterform. There are lots of papers that have been posted in this thread by myself and others that attempt to time these movements. They show some limited success, but I am not convinced that the benefit is worth it or even that it will be persistent.

Replies in red:
hdas wrote: Sat Nov 20, 2021 12:34 pm
skierincolorado wrote: Fri Nov 19, 2021 1:14 pm There are at least a dozen or so others on the ITT bandwagon, perhaps you have missed it. Not to mention the hedge funds and pensions that buy large amounts of ITT on leverage. Who do you think is buying the 10+ Trillion ITT market?
I have direct knowledge of this. And one of the main reasons is of liquidity. If you need to buy 400 million of treasuries, the slippage in UB can be a detriment. Reporting of position size also becomes an issue for the most facile players. That being said, relative value funds trade all the curve, cash, futures and swaps all the time. Yes some funds trade the whole curve. Nevertheless it is a much more common hedge fund strategy to be long the on the shorter durations. And that's why there is the liquidity and much larger market size.

Here, I showed you that the edge that this strategy started eroding in 2010. Run your preferred statistical test, dividing returns in two samples, pre and post 2010. See what the results tell you. All this shows is that ITT don't *ALWAYS* outperform ITT. Nobody said that they did. If you can show a valid criteria for consistently predicting when LTT will outperform, I am sure many would be interested. It is the default position of most on this forum to be skeptical of market timing - with good reason.

Image

All your "backtests" include look ahead bias, they are a naive interpolations. Follow this exercise: Imagine that your are sitting on Jan-2010 and you decided to implement this strategy. Your run the backtest up to the present (Dec-2009) and get this: I very much doubt that the 1955-present backtests posted in this thread include much lookahead bias, given the very long time period.

VUSTX > CAGR 7.67, STD 9.11, Sharpe 0.47
VFINX > CARG 6.78, STD 5.21, Sharpe 0.61

You say, GREAT!, I can leverage VFINX and do better than VUSTX, based on the information of the last 20 years. Let's leverage VFINX up to the level that matches the volatility VUSTX. Look at the beautiful backtest: By leveraging VFINX 1.78x, you match the volatility of VUSTX and get an extra 1.3% of CAGR, great!!. Now let's see how that played out in reality:

Image

To sum up:

1. Initial conditions (spread) matter A LOT! Again, I very much doubt that initial conditions matter to the 65+ year backtests posted in this thread.
2. Leverage can not be constant. Again, constant leverage worked well in 20, 40, and 65 year backtests through a variety of interest rate environments.
3. Backtest is only a tool to disprove not to validate. Backtests are not the only support for this strategy. There is also theoretical support (BAB).
4. Most of the linked pamphlets don't take into account curve movement.
5. The original BAB effect is concentrated in the 0-1 year. So only accessible to institutions with extremely cheap access to leverage. In times of low interest rates, the effect is negligibly to non existent. As we have seen since 2010. This is not true, the original BAB effect discusses the persistently poor returns of LTT. The reason that ITT have not done great since 2010 is not "low interest rates" it is the very large flattening the occurred from 2010 to 2018.

Most importantly: Every investor is better off matching duration to the investment horizon, in order to minimize interest rate risk. You are taking additional unnecessary risk by deviating from this and adding leverage to that. Historically, this has never been true. There is no 30+ year period where an investor would have been better off duration matching with LTT than they would have leveraging 5 year treasuries 2.5x.

I like the strategy in these settings:

1. Can help more efficient use of capital, used within a diversified portfolio, if the LTT contract is too big.
2. Opportunistically, when the term premium is low.
3. When the investor understand the data and has a clear view on why and when the strategy is poised to under/over perform.

I'm going to leave this thread and perhaps never come back, but I'll drop this for further thought:

For and optimally diversified portfolio of assets like the one you guys are attempting to build (stock/bonds), the optimal rebalancing window is DAILY, the effects of this after 10, 20, 30 years is astounding. The futures only portfolio cant do this unless we are talking massive size portfolios.
This is again another remarkable claim, but without evidence. The original HFEA does not use daily rebalancing between stocks and bonds. In fact the daily rebalancing is away from the target. If stocks go down, UPRO *sells* stocks. At least futures don't do that. The original HFEA rebalances back to target on a quarterly basis or with rebalancing bands. The same can easily be accomplished with futures by supplementing the futures position with VGIT and VTI, or TYA and UPRO to achieve smaller increments. Using futues instead of LETF has the benefit of not rebalancing *away* from target on a daily basis. And it is still possible to rebalance back to target using the cash positions. If someone chose to do so on a daily basis, it's just as possible as it is with LETF or other forms of leverage. With 100-200k in cash, it is possible to achieve any target AA and rebalance back to that AA daily. Decent approximations can be accomplished with as little as 40-50k.

Also, there is no benefit to more frequent rebalancing between stocks and bonds. Vanguard Mod Growth which uses daily rebalancing shows no beneift over quarterly rebalancing of the underlying components. Daily rebalancing of leverage (such as UPRO, SSO) has been slightly detrimental over the last 20 years (slight volatility decay).
https://www.portfoliovisualizer.com/bac ... on5_2=11.7

Cheers.
Just some friendly advice, I suggest slowing down and posting evidence of your claims. You originally claimed in this thread that futures did not match the performance of bonds at all, which was shown to be false and you subsequently deleted many of the posts. I'm all for discussion, but evidence needs to be provided and judged on its merits.
Last edited by skierincolorado on Sun Nov 21, 2021 8:23 pm, edited 5 times in total.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by firebirdparts »

FWIW I’m not even looking for evidence. As I understand reality, I would not want to experience the failures and losses that daily rebalancing would cause. Not interested.
This time is the same
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

firebirdparts wrote: Sun Nov 21, 2021 12:11 pm FWIW I’m not even looking for evidence. As I understand reality, I would not want to experience the failures and losses that daily rebalancing would cause. Not interested.
FWIW there is no difference between rebalancing between stocks and bonds daily and quarterly. So while hdas' claim of an 'astounding' daily rebalance benefit is false, there also is no consequence (see backtest below of Vanguard Mod Growth fund which uses daily rebal, vs quarterly rebal of underlying funds). Daily rebalancing of the leverage ratio (maybe that's what you are referring to) is different. Daily rebal of leverage can be beneficial or detrimental. Over the last 20 years or so daily rebalance of 2x of SPY has returned nearly 2x cumulative return of SPY pre fees and financing costs, but overall I agree - less frequent rebalancing of leverage ratio is probably better.

https://www.portfoliovisualizer.com/bac ... on5_2=11.7
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

hdas wrote: Sat Nov 20, 2021 11:45 am
Booogle wrote: Fri Nov 19, 2021 9:37 pm Shouldn't bond convexity make Long term Treasuries superior to Intermediate?

https://portfoliocharts.com/2019/05/27/ ... convexity/
Yes Mr. Boogle, because of convexity LTT are superior to ITT as a hedge in times of crisis. But don't rely on this forum for information, there's a lot of nonsense in this thread. Go directly to the data, with daily granularity at a minimum. For you to be able to mimic the behavior of a fund like GOVZ using ZF during the height of COVID, you need to dynamically adjust the hedge ratio and go from 4x to up to 12x, for a few days.H
Let's do a fact check on the Spring 2020 stock market crash:
Index values per spglobal.com : 12/31/2019 / 03/18/2020 (the treasury drawdown episode) / 03/31/2020 (treasury gain after the intermittent treasury drawdown episode) / gain per 03/18/2020 / gain per 03/31/2020 / duration / gain per 03/18/2020 normalized to duration of UB / gain per 03/31/2020 normalized to duration of UB
ZF future: 576.66 / 598.95 / 609.18 / 3.87% / 5.6% / 4.23 / 16.9% / 24.5%
UB future: 185.43 / 201.01 / 229.46 / 8.4% / 23.7% / 18.5 / 8.4% / 23.7%

It looks like because of the intermitted treasury drawdown episode, ITTs did significantly better (duration adjusted) during the Spring 2020 stock market crash.
Disregarding the intermittent drawdown, ITTs and LTTs did about equally good on a duration-adjusted basis.
Remember that skier's assumptions are based on a somewhat higher tail risk of ITTs duration-adjusted, I think mostly based on a 50ies to 80ies stagflation like worst case period. His recommended ITT:LTT conversation ratio is somewhat lower than strictly duration based. I think his rationale is to target a somewhat lower equity leverage in combination with a somewhat lower ITT leverage than one equivalent to traditional HFEA, for the best overall risk-adjusted returns based on a wide range of possible future scenarios. In other words, although mHFEA might have fared slightly worse than HFEA in Spring 2020 (IF we were to disregard the Mar 18 2020 treasury drawdown, which we shouldn't disregard), the Spring 2020 episode is not the worst case scenario under his assumptions. Please correct me if I'm wrong.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Sun Nov 21, 2021 11:40 am Also, there is no benefit to more frequent rebalancing between stocks and bonds. Vanguard Mod Growth which uses daily rebalancing shows no beneift over quarterly rebalancing of the underlying components.
Interesting, I couldn't find that information about daily rebalancing on VSMGX's web site or the documents. It looks like they invest in 4 other mutual funds. Mutual funds are usually traded at end-of-day NAV quotations (i.e. disregarding trading cost), and are usually not allowed to be frequently traded in and out, as the remaining long-term fund investors would effectively be paying the trading cost of the folks trading in and out I think. I'm curious how Vanguard would handle or justify this if they do daily rebalancing as fund-of-fund with their own mutual funds.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

comeinvest wrote: Sun Nov 21, 2021 7:30 pm
skierincolorado wrote: Sun Nov 21, 2021 11:40 am Also, there is no benefit to more frequent rebalancing between stocks and bonds. Vanguard Mod Growth which uses daily rebalancing shows no beneift over quarterly rebalancing of the underlying components.
Interesting, I couldn't find that information about daily rebalancing on VSMGX's web site or the documents. It looks like they invest in 4 other mutual funds. Mutual funds are usually traded at end-of-day NAV quotations (i.e. disregarding trading cost), and are usually not allowed to be frequently traded in and out, as the remaining long-term fund investors would effectively be paying the trading cost of the folks trading in and out I think. I'm curious how Vanguard would handle or justify this if they do daily rebalancing as fund-of-fund with their own mutual funds.
There were a couple of threads on bogleheads indicating that they rebalance daily and use daily fund inflows and outflows to help do so, which makes sense.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

There seems to be a "dent" in the yield curve around the 10y. The 10y seems to follow an almost parallel downward shift of the curve in the 10-30y segment, all the while the 2-7y segment seems to move in the opposite direction and currently stabilizing there, creating this local concavity. I'm not sure if this is an artifact that I'm not understanding, or if the 15-20y area is the outlier and will drop soon; but to be safe, I got rid of my TNs and replaced them with ZNs on duration-adjusted basis.
I think skier will like this idea, even though for other reasons, lol.
Last edited by comeinvest on Mon Nov 22, 2021 2:25 pm, edited 1 time in total.
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

ZN took a real beating this quarter for sure. My position in it is down $32k. I was probably a little overweight though. Whatevs, part of the game.

Historically I've treated my 401k/IRA/taxable portfolios as fairly separate, but I've been meaning to think of them more holistically. Currently, my 401k and IRA are primarily in classic HFEA, while my taxable is mHFEA. My 401k is a self-directed brokerage, so I can buy LETFs, but it does not allow futures.

From a taxation perspective, since futures have to be "realized" every quarter, would it make the most sense for all futures to be in the IRA? Current thinking is:
401k: Keep with the LETF approach, just balance it separately. Probably just think about this account separately overall. Currently value is $150k, but a chunk of that is in after-tax, and will be rolled over to my IRA at the end of the year.
Taxable account: All stock, no leverage. Probably all VT. Or maybe all NTSX? Currently about $475k.
IRA: Calculate target leverage based on total value of taxable + IRA, then attain that leverage via stock, stock futures, and treasury futures. Currently about $310k.

Thoughts? Might be worth opening a separate thread to discuss optimizing taxation in highly leveraged portfolios.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

DMoogle wrote: Mon Nov 22, 2021 1:07 pm ZN took a real beating this quarter for sure. My position in it is down $32k. I was probably a little overweight though. Whatevs, part of the game.

Historically I've treated my 401k/IRA/taxable portfolios as fairly separate, but I've been meaning to think of them more holistically. Currently, my 401k and IRA are primarily in classic HFEA, while my taxable is mHFEA. My 401k is a self-directed brokerage, so I can buy LETFs, but it does not allow futures.

From a taxation perspective, since futures have to be "realized" every quarter, would it make the most sense for all futures to be in the IRA? Current thinking is:
401k: Keep with the LETF approach, just balance it separately. Probably just think about this account separately overall. Currently value is $150k, but a chunk of that is in after-tax, and will be rolled over to my IRA at the end of the year.
Taxable account: All stock, no leverage. Probably all VT. Or maybe all NTSX? Currently about $475k.
IRA: Calculate target leverage based on total value of taxable + IRA, then attain that leverage via stock, stock futures, and treasury futures. Currently about $310k.

Thoughts? Might be worth opening a separate thread to discuss optimizing taxation in highly leveraged portfolios.
"From a taxation perspective, since futures have to be "realized" every quarter, would it make the most sense for all futures to be in the IRA?" - I will use treasury futures in taxable, but no equity futures. Instead I will use box spreads and individual equities in taxable ("index sampling") - I don't think I have many followers doing this, but I think a few other bogleheads do the same. I don't like any ETF in taxable, because eventually I would be "locked into" it for tax reasons, and I don't know my investment preferences in 10-20 years, nor the availability of products, nor do I have control over if and when ETFs are terminated, plus I can do more tax loss harvesting.

"IRA: Calculate target leverage based on total value of taxable + IRA" - Not sure how this would work out during a crash. Depending on your leverage and deleverage strategy, you might incur unintended consequences like excessive drainage of your IRA during crashes. I personally tend to use about the same leverage in every account, although there is probably a slight potential for optimization beyond that based on account type, but the math would get complicated.
zkn
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by zkn »

comeinvest wrote: Mon Nov 22, 2021 2:39 pm
DMoogle wrote: Mon Nov 22, 2021 1:07 pm ZN took a real beating this quarter for sure. My position in it is down $32k. I was probably a little overweight though. Whatevs, part of the game.

Historically I've treated my 401k/IRA/taxable portfolios as fairly separate, but I've been meaning to think of them more holistically. Currently, my 401k and IRA are primarily in classic HFEA, while my taxable is mHFEA. My 401k is a self-directed brokerage, so I can buy LETFs, but it does not allow futures.

From a taxation perspective, since futures have to be "realized" every quarter, would it make the most sense for all futures to be in the IRA? Current thinking is:
401k: Keep with the LETF approach, just balance it separately. Probably just think about this account separately overall. Currently value is $150k, but a chunk of that is in after-tax, and will be rolled over to my IRA at the end of the year.
Taxable account: All stock, no leverage. Probably all VT. Or maybe all NTSX? Currently about $475k.
IRA: Calculate target leverage based on total value of taxable + IRA, then attain that leverage via stock, stock futures, and treasury futures. Currently about $310k.

Thoughts? Might be worth opening a separate thread to discuss optimizing taxation in highly leveraged portfolios.
"From a taxation perspective, since futures have to be "realized" every quarter, would it make the most sense for all futures to be in the IRA?" - I will use treasury futures in taxable, but no equity futures. Instead I will use box spreads and individual equities in taxable ("index sampling") - I don't think I have many followers doing this, but I think a few other bogleheads do the same. I don't like any ETF in taxable, because eventually I would be "locked into" it for tax reasons, and I don't know my investment preferences in 10-20 years, nor the availability of products, nor do I have control over if and when ETFs are terminated, plus I can do more tax loss harvesting.

"IRA: Calculate target leverage based on total value of taxable + IRA" - Not sure how this would work out during a crash. Depending on your leverage and deleverage strategy, you might incur unintended consequences like excessive drainage of your IRA during crashes. I personally tend to use about the same leverage in every account, although there is probably a slight potential for optimization beyond that based on account type, but the math would get complicated.
For me: Futures for treasuries, box spread financed ETFs for stocks. I also have a small amount in EM bond ETFs (VWOB, LEMB), but no corporate or ex-US developed bonds. No access to leverage in my 401k (no derivatives, no ETFs), so I use more leverage in taxable to reach target leverage overall. I was reluctant to overleverage too much in taxable, so I only reached my target exposure recently as my taxable account grew faster due to the leverage to about 75% of my portfolio.
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skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

millennialmillions wrote: Sun Nov 21, 2021 10:48 am For all those implementing this strategy with treasury futures, we're coming up on the time to roll to the March contracts. This will be my first time doing so - posting to hopefully help others and allow anyone to point out my own misconceptions. According to CME's Pace of the Roll User Guide, "in recent history the majority of the open interest rolls during the last 10 business days before the contract month begins." You can see current volume here (for ZF for example). Based on that info, I'm planning to roll all my treasuries future contracts tomorrow 11/22.

To roll the contracts from December to March, I am planning to use a calendar spread order to ensure I sell the December contract and buy March at the same time. Here is a walkthrough of how to do that in TWS, but it is also very intuitive in the mobile app under "Future Spread Combo", which is what I'm planning to use.

Note that the typical roll timing for equities futures is later, eight calendar days before the contract expires. So for December contracts, that is a roll date of 12/9/21.

On a side note, I've seen a lot of questions from people looking to implement some variant of this strategy without (understandably) reading the 17 pages of content in this thread. I think I will start a Google doc to summarize everything so far.
I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
What is the advantage of using mobile? I'm hesitant to use mobile for anything in investing. I also like to use limit orders for the rolls.
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

comeinvest wrote: Mon Nov 22, 2021 5:35 pm
skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
What is the advantage of using mobile? I'm hesitant to use mobile for anything in investing. I also like to use limit orders for the rolls.
I always use IB mobile. Interface is 1000x better than TWS.
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millennialmillions
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
I also got an error when trying to execute a limit buy. I then succeeded using a market order. Not sure why that is...maybe the app has trouble with negative prices?

Like DMoogle, I much prefer the mobile interface. So I'll probably continue to just do market orders in the app during normal trading hours. I also think it would be fine to just sell and then buy rather than using a calendar spread, only losing out on a couple minutes in the market, right?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
Did anybody figure out how to fix the problem with charts of futures spreads in TWS "Latest"? It stopped working for me a while ago.
zkn
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by zkn »

comeinvest wrote: Mon Nov 22, 2021 10:18 pm
skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
Did anybody figure out how to fix the problem with charts of futures spreads in TWS "Latest"? It stopped working for me a while ago.
Works for me. To get there I will search for ZF, click on futures, then futures spreads, then select the appropriate spread in the combo selection window.

@millennialmillions: when the ask/bid spread on the futures calendar spread is only one tick, I think you would generally get a better fill trading the spread instead of each futures contract separately. Trading each futures contract separately would be equivalent to trading a calendar spread with an ask/bid spread of two ticks. Plus you might feel impatient to get a fill on the second futures contract.

I only use TWS.
jsgt
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by jsgt »

I'm catching up on this thread and I'm wondering about this topic brought up a few days ago:
klaus14 wrote: Thu Nov 11, 2021 10:12 pm You'll need around 10 2k collateral to carry this position. It is called margin but it is not margin in the sense that you are borrowing. You are not borrowing if you have 10 2k cash. If you don't IBKR will use margin (the other kind of margin) to lend you 10 2k and you'll pay interest.
Hfearless wrote: Fri Nov 12, 2021 7:57 am If you have spare cash, it will be used for collateral. If you do not, IBKR will happily lend it to you and charge the usual margin loan rates for it, this happens automatically.
I was under the impression this was not the case since I've heard IBKR liquidates holdings (instead of issuing margin calls) when accounts fall below margin requirements. Is this only the case for margin and not for futures collateral/margin?
Kbg
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Kbg »

Sound advice...don't ask for margin advice on an internet board other than what might be a good amount to set aside per contract. And then, take that with a huge grain of salt.

You really need to do your own due diligence to understand how your brokerage does things. If you are at IB, they have lots of information on this very topic...and never forget, they can and will change their requirements if the markets are under stress.

CME margin requirements can change daily as well.

Bottom line: Understand the rules for your brokerage, leave a healthy buffer so that you don't get liquidated unexpectedly even at the expense of "optimizing profits." Remember, margin requirements are a moving target.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Hfearless »

jsgt wrote: Tue Nov 23, 2021 8:58 am I was under the impression this was not the case since I've heard IBKR liquidates holdings (instead of issuing margin calls) when accounts fall below margin requirements. Is this only the case for margin and not for futures collateral/margin?
It will most certainly do that should you fail to meet the maintenance margin, but futures don’t make that particularly likely.

Suppose you have $100k. You could buy SPY with all that money, and add two ZF contracts on top of that. One /ZF has a notional value of about $121k, while its maintenance margin is as low as $1k. So you place the order, you have exposure to $100k of SPY and $240k of bonds, IBKR lends you $2k and posts it as the collateral. Should the bonds fall in value, IBKR will lend you more money to cover that. For you to face a margin call, bonds would have to fall about 30% (or less if the equities also drop). The entire point of holding bonds is that their drawdowns aren’t that severe, and rarely at the same time as the equities.
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

OK, current plan for taxable account rebalance based on comments above:
Current:
$465k net value.
->$690k in equity exposure (about 5/2 US/int split). Leverage on equity exposure is from box spreads.
-> $1.27M in treasury exposure (about $100k exposure due to NTSX/NTSI, with the remaining $1.17M in 9 ZN contracts).
-> Current ratio is 150/270.

Plan:
Going to increase leverage on equities and decrease on treasuries (both $ amount and by duration). I think a target 165/250 split sounds reasonable with my risk tolerance.
For equities: Simply add more via box spreads. Probably dumping in VTI/VT.
For treasuries: Decided against ZB/TN completely, and now planning on going to 6 ZF and 3 ZN, for a total of $1.12M. Plus, I'll continue to have the $100k exposure in NTSX/NTSI, which IIRC has a duration of ~8, so I have some longer duration diversification there.

Holding off on touching my IRA until I roll over my after-tax 401k next month.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

zkn wrote: Tue Nov 23, 2021 8:44 am
comeinvest wrote: Mon Nov 22, 2021 10:18 pm
skierincolorado wrote: Mon Nov 22, 2021 4:25 pm I tried rolling with the mobile app - it looks easier but I got an error. So I had to go through TWS instead as usual which is more difficult, but worked fine. Anyboyd having success rolling with the mobile app? Thanks for this suggestion, would be great if it works.
Did anybody figure out how to fix the problem with charts of futures spreads in TWS "Latest"? It stopped working for me a while ago.
Works for me. To get there I will search for ZF, click on futures, then futures spreads, then select the appropriate spread in the combo selection window.

@millennialmillions: when the ask/bid spread on the futures calendar spread is only one tick, I think you would generally get a better fill trading the spread instead of each futures contract separately. Trading each futures contract separately would be equivalent to trading a calendar spread with an ask/bid spread of two ticks. Plus you might feel impatient to get a fill on the second futures contract.

I only use TWS.
I know how to create a line item in TWS with the calendar spread. However, the *bid/ask charts* (not the trades charts) for almost any futures spread, actually any spread, stopped working in TWS "Latest" 90+% of times. It still works in TWS Stable. In TWS Latest, it shows the lines for bid and ask far apart, totally unusable. The developers messed up, somehow they got the addition/subtraction for the spread chart wrong. The problem is that TWS Stable has numerous other issues with futures spreads, for example Stable has the notation for treasury futures sometimes wrong, for example it shows sometimes e.g. 1'580 (i.e. more than 320 for the fraction after the ' sign) as quote, and even as limit on my own order, for a futures spread. Also, neither in TWS Latest nor TWS Stable can I see a chart with the history of the exchange-traded spread. It only shows the history of the synthetic quotes, not the native quotes; then it starts drawing the native quotes if "keep chart up to date" is checked, but only from the time when I generate the chart. It seems like IB didn't get their act together - futures trading at IB seems to be work in progress. Hard to believe they call it "professional" platform. But other than the quirks, I personally totally love IB for the most part both for their capabilities and for their TWS.
Last edited by comeinvest on Tue Nov 23, 2021 5:35 pm, edited 2 times in total.
000
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by 000 »

I think you all have gone off the deep end here. :shock:
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

DMoogle wrote: Tue Nov 23, 2021 12:32 pm OK, current plan for taxable account rebalance based on comments above:
Current:
$465k net value.
->$690k in equity exposure (about 5/2 US/int split). Leverage on equity exposure is from box spreads.
-> $1.27M in treasury exposure (about $100k exposure due to NTSX/NTSI, with the remaining $1.17M in 9 ZN contracts).
-> Current ratio is 150/270.

Plan:
Going to increase leverage on equities and decrease on treasuries (both $ amount and by duration). I think a target 165/250 split sounds reasonable with my risk tolerance.
For equities: Simply add more via box spreads. Probably dumping in VTI/VT.
For treasuries: Decided against ZB/TN completely, and now planning on going to 6 ZF and 3 ZN, for a total of $1.12M. Plus, I'll continue to have the $100k exposure in NTSX/NTSI, which IIRC has a duration of ~8, so I have some longer duration diversification there.

Holding off on touching my IRA until I roll over my after-tax 401k next month.
Sounds good, but why NTSX/NTSI in the mix. Also, I think some mHFEA people don't go all-in yet because of uncertainties around whether there is a positive expected term premium currently. I'm not sure if there is enough historical precedence and validation of mHFEA for the situation of non-positive term premium.
zkn
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by zkn »

@comeinvest: I thought you might be accessing the charts via a different means that was buggy. Anyway, I have the same problem with the bid/ask charts, I must have missed an earlier post that gave the context.

@000: Maybe. I do wonder why we don't see anyone following a more moderate portfolio with the same principles, like 50% stock 150% ITT. Everyone wants to push the leverage, especially on the stock side.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

zkn wrote: Tue Nov 23, 2021 5:53 pm @comeinvest: I thought you might be accessing the charts via a different means that was buggy. Anyway, I have the same problem with the bid/ask charts, I must have missed an earlier post that gave the context.

@000: Maybe. I do wonder why we don't see anyone following a more moderate portfolio with the same principles, like 50% stock 150% ITT. Everyone wants to push the leverage, especially on the stock side.
Thanks for validating the charts problem. fyi - I put in a ticket request to fix this about 2 months ago and they acknowledged it, but it seems like Bitcoin stuff and the like generates more revenue for IB, and they focus on what's most productive for them. I don't blame them.

50/150: I think if you have a longer horizon, 50/150 would arguably be more risky to achieving your investment goals than 135/200 or something, considering that the future returns from treasuries are highly questionable even whether they will be positive or negative based on current valuations. The stock market is arguably more predictable to be positive at least over medium or longer time horizons, and then the treasuries are the icing on the cake, if they ever turn out to add to my returns. That's my thinking.

We do have to account for the possibility that the term premium will never be positive again, even if it sounds absurd. Times change. For example, whoever invests in German 30-year treasuries right now, is guaranteed a loss for 30 years of -2% p.a. if inflation is 2% over that time period, and I think inflation expectations implied from derivatives are around 2%, at least for the next 10 years or so. I know the term premium might still be slightly positive even with negative real returns, but even that is not guaranteed. Absurd does not mean impossible.

The equity risk premium will probably be lower than historically, but it was initially a lot higher than the term premium. So it might be that in the future, only equities can generate positive returns over investors' lifetimes. Likewise, unlike the past, I think the returns of the equity allocation might dominate the overall outcome in the future.
Last edited by comeinvest on Tue Nov 23, 2021 8:32 pm, edited 3 times in total.
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

comeinvest wrote: Tue Nov 23, 2021 5:41 pm Sounds good, but why NTSX/NTSI in the mix. Also, I think some mHFEA people don't go all-in yet because of uncertainties around whether there is a positive expected term premium currently. I'm not sure if there is enough historical precedence and validation of mHFEA for the situation of non-positive term premium.
I bought NTSX a while back and don't want to realize the gains, so I'm just keeping it in the mix and accounting for it accordingly. I could liquidate NTSI, but the volume is so low I'd probably be paying a small premium in the form of spreads.

As for the risk in the strategy... I haven't been following the thread super closely - is that open question about term premium relevant to LTTs as well? Bottom line, I realize that this is a risky strategy that may have more risk than backtests would suggest. If my net worth were to plummet to 10% (90% drawdown) of what it is today, then, well, that would suck, but I'm OK with that.

Plus I have a little overall strategy diversification with my HSA, 401k, and cash on-hand.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

DMoogle wrote: Tue Nov 23, 2021 7:51 pm
comeinvest wrote: Tue Nov 23, 2021 5:41 pm Sounds good, but why NTSX/NTSI in the mix. Also, I think some mHFEA people don't go all-in yet because of uncertainties around whether there is a positive expected term premium currently. I'm not sure if there is enough historical precedence and validation of mHFEA for the situation of non-positive term premium.
I bought NTSX a while back and don't want to realize the gains, so I'm just keeping it in the mix and accounting for it accordingly. I could liquidate NTSI, but the volume is so low I'd probably be paying a small premium in the form of spreads.

As for the risk in the strategy... I haven't been following the thread super closely - is that open question about term premium relevant to LTTs as well? Bottom line, I realize that this is a risky strategy that may have more risk than backtests would suggest. If my net worth were to plummet to 10% (90% drawdown) of what it is today, then, well, that would suck, but I'm OK with that.

Plus I have a little overall strategy diversification with my HSA, 401k, and cash on-hand.
Yeah term premium for LTT is probably as bad or worse. These term premium models are all estimates from what I can tell anyways so I don't know how much to trust them.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

DMoogle wrote: Tue Nov 23, 2021 7:51 pm
comeinvest wrote: Tue Nov 23, 2021 5:41 pm Sounds good, but why NTSX/NTSI in the mix. Also, I think some mHFEA people don't go all-in yet because of uncertainties around whether there is a positive expected term premium currently. I'm not sure if there is enough historical precedence and validation of mHFEA for the situation of non-positive term premium.
I bought NTSX a while back and don't want to realize the gains, so I'm just keeping it in the mix and accounting for it accordingly. I could liquidate NTSI, but the volume is so low I'd probably be paying a small premium in the form of spreads.

As for the risk in the strategy... I haven't been following the thread super closely - is that open question about term premium relevant to LTTs as well? Bottom line, I realize that this is a risky strategy that may have more risk than backtests would suggest. If my net worth were to plummet to 10% (90% drawdown) of what it is today, then, well, that would suck, but I'm OK with that.

Plus I have a little overall strategy diversification with my HSA, 401k, and cash on-hand.
Glancing over the term premia spreadsheet from the ACM model, it looks like the term premia were positive, somewhere in the 0.5% to 3% range during most of history. They turned negative for the first time in history around 2018, and are now at about -0.5%. I think those are all estimated, not realized term premia. Because of the jaw-dropping downward race of interest rates from two-digits in the 1980ies to close to zero, I think the realized term premia were usually higher than the estimated ones since then, of course. That does not necessarily invalidate the model. It is something that is unlikely to repeat, although there is still a tiny bit room left if we were to get to the European or Japanese levels. Since 2018 the realized term premia were obviously positive while the predicted ones were negative, but obviously this was due to another magnificent drop in LTT rates that has only very limited room to continue, if it does continue. I don't know much about the ACM model, but what seems intuitively clear to me is that not only real returns from treasuries, but also the term premia will be depressed based on lower levels of interest rates in general. Skier has made a convincing case for his mHFEA every time someone had doubt; maybe he will chime in regarding (the lack of) historical precedence of negative estimated term premia, and how it might affect the performance of HFEA and mHFEA.

EDIT: If term premia were negative (as per the ACM model) and stay negative (as some researchers predict), can we still harvest the ITT vs LTT duration-adjusted performance advantage? Who knows. My guess would be the ITT vs LTT anomaly might be muted too, and more difficult to harvest, in a generally depressed interest rate and term premia environment. But I think ITT is still likely to be better than LTT. Skier's analysis is very convincing.
Tinyz
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Tinyz »

Hi,

Very interesting. HAHA, is really fun to learn more. Just to understand, this strategy leverage on treasuries instead of stock and rely on two things. One, negative correlation with stock. Two, positive returns from risk free borrowing. Doing it with futures remove the volatility decay.

I will like to ask what will fed interest be to cause this to fail?
What is the correlation number between stock and bond for this to fail?
Has it ever failed?
Is this strategy only working in US market? What about nikkei?

If this is working so well, why not x3,x30 or even x300 treasuries?

Sorry, not trying to hammer any theory, will like to learn more. Thanks!
Kbg
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Kbg »

I would say read the previous 17 pages and make your own determination. Plenty of data there and all we have is history. We do not know the future. It is easy enough for you to use the PortfolioVisualizer website or Simba spreadsheet as well to see how various mixes would have fared in various economic conditions and their correlations.

From such a study you can make an educated guess as to your questions.
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

Tinyz wrote: Wed Nov 24, 2021 12:35 amOne, negative correlation with stock. Two, positive returns from risk free borrowing.
Good questions, but I think these are both faulty assumptions. The core of this entire idea is simply taking the age-old recommendation of a balanced stock/bond portfolio, figuring out the optimal allocation in each, and leveraging it up to meet a person's individual risk tolerance. Essentially, the risk:reward ratio of a leveraged balanced portfolio should be greater than a 100% stock portfolio.

On negative correlations: Treasuries, specifically, have historically had negative correlation with stock, and one unique feature of this is that that negative correlation tends to show up the most during a stock crash. This certainly helps significantly with the overall risk profile. Lower correlation is certainly better in a vacuum, but even 0 correlation or low positive correlation can still make this portfolio a viable option.

On positive returns from risk-free borrowing: I'm not entirely sure where you got this from - investing in treasuries is NOT risk-free. ITTs are down several percent over the past few months.
millennialmillions wrote: Sun Nov 21, 2021 10:48 amTo roll the contracts from December to March, I am planning to use a calendar spread order to ensure I sell the December contract and buy March at the same time. Here is a walkthrough of how to do that in TWS, but it is also very intuitive in the mobile app under "Future Spread Combo", which is what I'm planning to use.
Where is the Future Spread Combo in the mobile app? Kept poking around and couldn't find it. Probably just going to sell DEC position and buy next quarter's separately.
hdas
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by hdas »

hhhhhh
Last edited by hdas on Wed Nov 24, 2021 2:44 pm, edited 1 time in total.
....
DMoogle
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

Anyone concerned about the spreads? Bid/ask spread is 5 ticks. If my math is correct, that's 0.5/32*1000 = $15.625, so you're effectively paying that spread for each contract rollover, which will be 4x/year -> $62.50 per contract, per year. I guess on >$120k of exposure, that's only ~0.05% which isn't THAT much in the grand scheme of things, but I guess I never really considered it until now.
Topic Author
skierincolorado
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by skierincolorado »

hdas wrote: Wed Nov 24, 2021 11:55 am
000 wrote: Tue Nov 23, 2021 5:01 pm I think you all have gone off the deep end here. :shock:
skierincolorado wrote: Tue Nov 23, 2021 8:49 pm Yeah term premium for LTT is probably as bad or worse. These term premium models are all estimates from what I can tell anyways so I don't know how much to trust them.
comeinvest wrote: Mon Nov 22, 2021 5:19 am I got rid of my TNs and replaced them with ZNs on duration-adjusted basis.
I think skier will like this idea, even though for other reasons, lol.
Indeed, as a service to the community...let us evaluate the performance, specifically highlighting how the timing of the switch from LTT to ITT can determine the outcome of the strategy for many, many years.

By some estimation** (we don't have complete information), we can say that if a person followed Mr. Skier path and switched from LTT to ITT in mid march, 3 things are baked in as of today:

1. It will take many years, perhaps until a new Fed easing cycle for this person to recover in relative terms.
2. His/her position is down around ~5% in absolute terms.
3. His/her position is down around ~18%, relative to staying or opting for LTT at that specific juncture. We are talking big numbers here, for a big portfolio.

Mr. Skier has the statements to corroborate all this, and I suspect that he is OK to be down almost 20% in relative terms, because he thinks he is getting some roll yield, and some BAB and that makes him happy, so that must be factored in his utility function, before passing judgement.

** This is conservative, assuming they leveraged ZF 3 times only. And the relative performance is evaluated against EDV. At the time of this msg the 5/30 spread is down to 0.64%
Of course, like your other posts, you have cherry picked start and end dates most favorable to LTT and least favorable to ITT. If one could go back in time to March 18th and perfectly predict that LTT were about to outperform ITT, that would indeed be valuable information. What we need is a criterion that accurately predicts when to market time, but no such criterion has been presented by you or any of the papers I have read (some do propose some market timing strategies with some limited success although none went farther than 10y in duration). I can say that I am not down nearly as much as you suggest on my bond position, and I doubt others are either unless they had the misfortune of entering this strategy on the worst possible day of the last decade or have more leverage. I am down under 3%. Comeinvest had some success market timing the switch, but I’m not entirely convinced it’s reproduceable.
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