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

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

Post by DMoogle »

LTCM wrote: Mon Jun 06, 2022 2:14 pm
DMoogle wrote: Mon Jun 06, 2022 8:43 am
Taking you seriously, spreads+commissions on treasury futures would actually start to have a noticeable effect. IIRC it ends up being like 0.05% expense annualized (might be off on this). With that much leverage, you're going to be looking at something like 2% expense/annum.
Do you have specific numbers for those commissions? I can plug them in to the back test sheet just to see what happens.

Looking at IB commissions and assuming a 100k account I get approx $15 per year for the 250% LTT. $85 for the STT. $75 for the ITT. So $175 total which is only 0.175 ER for the entire scheme. (T-bill cost is already factored in but VTI ER would need adding).

I thought it was interesting that ITT needs shorting to get the max Sharpe on a short/long treasury position. Is it even possible to short ITT in a tax deferred account or would that need to be taxable?
Spreads would be the bigger issue. Minimum ticks are $15.625 (initial buy) and half that for calendar spreads (rollover).

It's more of an implicit rather than explicit cost, but it shouldn't be overlooked.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

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

Post by LTCM »

DMoogle wrote: Mon Jun 06, 2022 2:27 pm
LTCM wrote: Mon Jun 06, 2022 2:14 pm
DMoogle wrote: Mon Jun 06, 2022 8:43 am
Taking you seriously, spreads+commissions on treasury futures would actually start to have a noticeable effect. IIRC it ends up being like 0.05% expense annualized (might be off on this). With that much leverage, you're going to be looking at something like 2% expense/annum.
Do you have specific numbers for those commissions? I can plug them in to the back test sheet just to see what happens.

Looking at IB commissions and assuming a 100k account I get approx $15 per year for the 250% LTT. $85 for the STT. $75 for the ITT. So $175 total which is only 0.175 ER for the entire scheme. (T-bill cost is already factored in but VTI ER would need adding).

I thought it was interesting that ITT needs shorting to get the max Sharpe on a short/long treasury position. Is it even possible to short ITT in a tax deferred account or would that need to be taxable?
Spreads would be the bigger issue. Minimum ticks are $15.625 (initial buy) and half that for calendar spreads (rollover).

It's more of an implicit rather than explicit cost, but it shouldn't be overlooked.
So If I want to add these costs as an ER in the backtest sheet...

For $100,000 of ZF (5 year) its $7.81+$3.905+$3.905+$3.905 (spreads) + 0.85+0.85+0.85+0.85 (commissions) = $22.92
So the ER for $100,000 (or currently $112,000) of exposure is 0.023%(or currently 0.020%)?

That's cheaper than the ETF while excluding financing. Is that right?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Mon Jun 06, 2022 2:26 pm
comeinvest wrote: Mon Jun 06, 2022 5:44 am Not sure if you actually tested something or if you are joking, but if you have long and short positions on the treasury yield curve, you can have very large positions magnitudes higher than your NAV, that have quite low total fluctuations / risk, as the duration exposures cancel each other out. You can also get margin offsets at CME.
I back tested it. That's where I got the returns and Sharpe ratios from. I was hoping to be able to get to 0.5 Sharpe over the 150 year period but couldn't quite manage it. I was sticking to 100% stocks and only trying to manipulate the short/long Treasury position though.

I'm not joking about being interested but 'm not about to actually do it because it's terrifying.

The returns on the position since 2020 are mildly amusing. I'll post a link when I'm back at my computer.
You probably didn't account for transaction cost, which might kill this strategy.
Interesting that you come up with negative ITT, whereas ITT are the preferred addition to equities in the mHFEA backtests.
Would be interesting to solve a long/short optimization problem, but it's a rather huge numerical effort, and there is that principal problem of the predictive capability (or lack of it) of in-sample optimizations as you increase the number of parameters. I would perhaps start with mean-reverting models of slope and curvature in addition to interest rate (duration) risk, as described in some papers, or with a yield curve carry approach.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by DMoogle »

LTCM wrote: Mon Jun 06, 2022 7:40 pmSo If I want to add these costs as an ER in the backtest sheet...

For $100,000 of ZF (5 year) its $7.81+$3.905+$3.905+$3.905 (spreads) + 0.85+0.85+0.85+0.85 (commissions) = $22.92
So the ER for $100,000 (or currently $112,000) of exposure is 0.023%(or currently 0.020%)?

That's cheaper than the ETF while excluding financing. Is that right?
Hmmm, that looks correct. I could've sworn it was higher when I calculated it before. Maybe I was multiplying it by my total exposure.

So in this case, your gross treasury exposure (equity exposure aside) is 250% + 2500% + 1250% + 1500% = 5500%. So the expense you're eating from spreads and commissions comes out to 0.02% * 55 = 1.1% ER.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

DMoogle wrote: Tue Jun 07, 2022 8:36 am
LTCM wrote: Mon Jun 06, 2022 7:40 pmSo If I want to add these costs as an ER in the backtest sheet...

For $100,000 of ZF (5 year) its $7.81+$3.905+$3.905+$3.905 (spreads) + 0.85+0.85+0.85+0.85 (commissions) = $22.92
So the ER for $100,000 (or currently $112,000) of exposure is 0.023%(or currently 0.020%)?

That's cheaper than the ETF while excluding financing. Is that right?
Hmmm, that looks correct. I could've sworn it was higher when I calculated it before. Maybe I was multiplying it by my total exposure.

So in this case, your gross treasury exposure (equity exposure aside) is 250% + 2500% + 1250% + 1500% = 5500%. So the expense you're eating from spreads and commissions comes out to 0.02% * 55 = 1.1% ER.
I don't think I would need to pay any spreads/commissions on the 1500% T-Bill. That's the financing cost. I don't actually buy the futures right?

So total treasury ER would be 0.8%. Plus the 0.03 VTI ER. Plus the cost of any financing over and above the T-Bill rate which as I understand it should be very close to nil on average? Maybe 0.85 total?

I've seen worse! (TMF & UPRO)
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

comeinvest wrote: Tue Jun 07, 2022 4:19 am
LTCM wrote: Mon Jun 06, 2022 2:26 pm
comeinvest wrote: Mon Jun 06, 2022 5:44 am Not sure if you actually tested something or if you are joking, but if you have long and short positions on the treasury yield curve, you can have very large positions magnitudes higher than your NAV, that have quite low total fluctuations / risk, as the duration exposures cancel each other out. You can also get margin offsets at CME.
I back tested it. That's where I got the returns and Sharpe ratios from. I was hoping to be able to get to 0.5 Sharpe over the 150 year period but couldn't quite manage it. I was sticking to 100% stocks and only trying to manipulate the short/long Treasury position though.

I'm not joking about being interested but 'm not about to actually do it because it's terrifying.

The returns on the position since 2020 are mildly amusing. I'll post a link when I'm back at my computer.
You probably didn't account for transaction cost, which might kill this strategy.
Interesting that you come up with negative ITT, whereas ITT are the preferred addition to equities in the mHFEA backtests.
Would be interesting to solve a long/short optimization problem, but it's a rather huge numerical effort, and there is that principal problem of the predictive capability (or lack of it) of in-sample optimizations as you increase the number of parameters. I would perhaps start with mean-reverting models of slope and curvature in addition to interest rate (duration) risk, as described in some papers, or with a yield curve carry approach.
the mHFEA backtests probably don't go back 150 years. ITT was always chosen as (I think) a compromise between STT & LTT. The bet against beta element of LTT and the worries around financing cost of STT. The efficient frontier prefers a mix of both to ITT which is why increasing those and using ITT as the hedge does so well. How reliable that is going forward who knows, but on the backtest ITT has always been 3rd best.

Working on transactions costs at the moment, but they don't seem that bad. Futures are so cheap.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Tue Jun 07, 2022 1:49 pm
comeinvest wrote: Tue Jun 07, 2022 4:19 am
LTCM wrote: Mon Jun 06, 2022 2:26 pm
comeinvest wrote: Mon Jun 06, 2022 5:44 am Not sure if you actually tested something or if you are joking, but if you have long and short positions on the treasury yield curve, you can have very large positions magnitudes higher than your NAV, that have quite low total fluctuations / risk, as the duration exposures cancel each other out. You can also get margin offsets at CME.
I back tested it. That's where I got the returns and Sharpe ratios from. I was hoping to be able to get to 0.5 Sharpe over the 150 year period but couldn't quite manage it. I was sticking to 100% stocks and only trying to manipulate the short/long Treasury position though.

I'm not joking about being interested but 'm not about to actually do it because it's terrifying.

The returns on the position since 2020 are mildly amusing. I'll post a link when I'm back at my computer.
You probably didn't account for transaction cost, which might kill this strategy.
Interesting that you come up with negative ITT, whereas ITT are the preferred addition to equities in the mHFEA backtests.
Would be interesting to solve a long/short optimization problem, but it's a rather huge numerical effort, and there is that principal problem of the predictive capability (or lack of it) of in-sample optimizations as you increase the number of parameters. I would perhaps start with mean-reverting models of slope and curvature in addition to interest rate (duration) risk, as described in some papers, or with a yield curve carry approach.
the mHFEA backtests probably don't go back 150 years. ITT was always chosen as (I think) a compromise between STT & LTT. The bet against beta element of LTT and the worries around financing cost of STT. The efficient frontier prefers a mix of both to ITT which is why increasing those and using ITT as the hedge does so well. How reliable that is going forward who knows, but on the backtest ITT has always been 3rd best.

Working on transactions costs at the moment, but they don't seem that bad. Futures are so cheap.
I'm not quite understanding your rationalization that ITT is negative in your optimization but positive in mHFEA, and that you have a positive bet FOR beta and in the STT which might have higher financing cost.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

comeinvest wrote: Tue Jun 07, 2022 5:31 pm I'm not quite understanding your rationalization that ITT is negative in your optimization but positive in mHFEA, and that you have a positive bet FOR beta and in the STT which might have higher financing cost.
ITT is positive in general. It works really well with stocks because of the negative correlation. It's just not as good with stocks as STT & LTT. Shorting ITT allows you load up on STT/LTT more because they're so similar. If it turns out that the financing is significantly over the T-Bill rate then it won't work.

From what I remember Skier doesn't believe in backtesting to 1871 but I prefer it personally.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Tue Jun 07, 2022 6:50 pm
comeinvest wrote: Tue Jun 07, 2022 5:31 pm I'm not quite understanding your rationalization that ITT is negative in your optimization but positive in mHFEA, and that you have a positive bet FOR beta and in the STT which might have higher financing cost.
ITT is positive in general. It works really well with stocks because of the negative correlation. It's just not as good with stocks as STT & LTT. Shorting ITT allows you load up on STT/LTT more because they're so similar. If it turns out that the financing is significantly over the T-Bill rate then it won't work.

From what I remember Skier doesn't believe in backtesting to 1871 but I prefer it personally.
I can't remember if he considered backtesting to before the 1950ies. But I'm surprised at your statement "not as good with stocks as STT & LTT", because skier showed that ITT is better than LTT in a stock/bond portfolio for the period from the 50ies to now - about 70 years with several full interest rate cycles.
What are the results of your simulation for the period from the 1950ies (can't remember skier's start date) to now?
Is it possible that the STT rebalanced with LTT resulted in a rebalancing bonus, but ITT alone would would be better than LTT alone?
I think skier's preference was for STT even over ITT, if there was not a concern regarding transaction and leverage cost.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

comeinvest wrote: Tue Jun 07, 2022 10:18 pm
LTCM wrote: Tue Jun 07, 2022 6:50 pm
comeinvest wrote: Tue Jun 07, 2022 5:31 pm I'm not quite understanding your rationalization that ITT is negative in your optimization but positive in mHFEA, and that you have a positive bet FOR beta and in the STT which might have higher financing cost.
ITT is positive in general. It works really well with stocks because of the negative correlation. It's just not as good with stocks as STT & LTT. Shorting ITT allows you load up on STT/LTT more because they're so similar. If it turns out that the financing is significantly over the T-Bill rate then it won't work.

From what I remember Skier doesn't believe in backtesting to 1871 but I prefer it personally.
I can't remember if he considered backtesting to before the 1950ies. But I'm surprised at your statement "not as good with stocks as STT & LTT", because skier showed that ITT is better than LTT in a stock/bond portfolio for the period from the 50ies to now - about 70 years with several full interest rate cycles.
What are the results of your simulation for the period from the 1950ies (can't remember skier's start date) to now?
Is it possible that the STT rebalanced with LTT resulted in a rebalancing bonus, but ITT alone would would be better than LTT alone?
I think skier's preference was for STT even over ITT, if there was not a concern regarding transaction and leverage cost.
If you only go back to the 1950s then I think you'd short LTT and long ITT & STT.

From what I can tell...
Sharpe ratios since 1871 (including the T-bill financing needed to balance the risk)
LTT 0.17
ITT 0.14
STT 0.21

Sharpe ratios since 1950 (including the T-bill financing needed to balance the risk)
LTT 0.22
ITT 0.25
STT 0.36

There's a strong STT advantage in both cases if you can leverage STT at the T-Bill rate.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Tue Jun 07, 2022 11:15 pm If you only go back to the 1950s then I think you'd short LTT and long ITT & STT.

From what I can tell...
Sharpe ratios since 1871 (including the T-bill financing needed to balance the risk)
LTT 0.17
ITT 0.14
STT 0.21

Sharpe ratios since 1950 (including the T-bill financing needed to balance the risk)
LTT 0.22
ITT 0.25
STT 0.36

There's a strong STT advantage in both cases if you can leverage STT at the T-Bill rate.
But we can't leverage STT at the T-bill rate, right? I think way up in this thread we found a certain spread of financing cost over T-bills, which was slightly less for STT than for ITT and LTT, but not proportional to the duration risk, if I remember right. So you would get hosed if you try to leverage an ever so slim term premium, minus cost, with a high leverage ratio.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

I missed the middle of this thread. I remember a lot of speculation you wouldn't be able to get the t-bill rate but nothing definitive. CME claims you get the t-bill rate on equities and if thats true I don't see why it wouldn't be true for treasuries.

If it really has been found that you don't get t-bill then that does change everything.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

I read up again and I'm still convinced the implied repo rate is the cost of borrowing on futures contracts.
The implied repo rate is the rate of return that can be earned by simultaneously selling a bond futures or forward contract, and then buying that actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid.
So the IRR is also the rate paid to buy a futures contract until the bond is delivered (in our case it never is and we just roll the contract).

The current IRR for the 2 year ZT June is 1.25. The current IRR for the 2 year ZT September is 1.23. The current 3 month T-Bill rate is 1.23.

It does fluctuate and I'm not sure if its so tight to the T-bill rate right now because we're in the roll period. We'd need to track it for longer.

Ultimately they're buying a risk free asset and loaning it to a risk free institution using money they can borrow an almost limitless amount of. How much extra do you think they can charge? The T-Bill rate and the futures contract are the same length. Almost by definition the cost of borrowing on a future should be the T-bill rate.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Wed Jun 08, 2022 5:04 pm I read up again and I'm still convinced the implied repo rate is the cost of borrowing on futures contracts.
The implied repo rate is the rate of return that can be earned by simultaneously selling a bond futures or forward contract, and then buying that actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid.
So the IRR is also the rate paid to buy a futures contract until the bond is delivered (in our case it never is and we just roll the contract).

The current IRR for the 2 year ZT June is 1.25. The current IRR for the 2 year ZT September is 1.23. The current 3 month T-Bill rate is 1.23.

It does fluctuate and I'm not sure if its so tight to the T-bill rate right now because we're in the roll period. We'd need to track it for longer.

Ultimately they're buying a risk free asset and loaning it to a risk free institution using money they can borrow an almost limitless amount of. How much extra do you think they can charge? The T-Bill rate and the futures contract are the same length. Almost by definition the cost of borrowing on a future should be the T-bill rate.
First off, I don't mean to assign homework to you, but you probably want to read the entire thread. Somewhere in the middle it has pretty diligent research and analysis on the implied financing rate (implied repo rate) of treasury futures. The financing rate is typically 0.2%-0.3% above the T-bill rate. Your comment shows that you didn't read this thread.

/ES futures have pretty consistent 0.5% financing spread above T-bill rate. I think I posted that also somewhere in this thread.

On another note, where did you get or how did you calculate the 1.25 and 1.23 repo rates for ZT? It would indeed be very close to the current 3-months T-bill rate. But the June contract expires soon, so you would have to compare it to the 1-month (or shorter) T-bill, right? The 1-month T-bill rate is currently 0.87% looking at the treasury yield curve. Something doesn't seem to be right here. I think the June contract is pretty illiquid right now after the delivery process notice deadlines, so be careful.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

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

Post by LTCM »

comeinvest wrote: Wed Jun 08, 2022 6:14 pm
LTCM wrote: Wed Jun 08, 2022 5:04 pm I read up again and I'm still convinced the implied repo rate is the cost of borrowing on futures contracts.
The implied repo rate is the rate of return that can be earned by simultaneously selling a bond futures or forward contract, and then buying that actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid.
So the IRR is also the rate paid to buy a futures contract until the bond is delivered (in our case it never is and we just roll the contract).

The current IRR for the 2 year ZT June is 1.25. The current IRR for the 2 year ZT September is 1.23. The current 3 month T-Bill rate is 1.23.

It does fluctuate and I'm not sure if its so tight to the T-bill rate right now because we're in the roll period. We'd need to track it for longer.

Ultimately they're buying a risk free asset and loaning it to a risk free institution using money they can borrow an almost limitless amount of. How much extra do you think they can charge? The T-Bill rate and the futures contract are the same length. Almost by definition the cost of borrowing on a future should be the T-bill rate.
First off, I don't mean to assign homework to you, but you probably want to read the entire thread. Somewhere in the middle it has pretty diligent research and analysis on the implied financing rate (implied repo rate) of treasury futures. The financing rate is typically 0.2%-0.3% above the T-bill rate. Your comment shows that you didn't read this thread.

/ES futures have pretty consistent 0.5% financing spread above T-bill rate. I think I posted that also somewhere in this thread.

On another note, where did you get or how did you calculate the 1.25 and 1.23 repo rate for ZT? It would indeed be very close to the current 3-months T-bill rate. But the June contract expires soon, so you would have to compare it to the 1-month (or shorter) T-bill, right? The 1-month T-bill rate is currently 0.87% looking at the treasury yield curve.
The current IRR is listed on the CME website. If you have a link to the paper I'll take a look. I've read the one for equities but not treasuries.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Wed Jun 08, 2022 6:20 pm The current IRR is listed on the CME website. If you have a link to the paper I'll take a look. I've read the one for equities but not treasuries.
Which paper? Go the the S&P global web site, there is a simulator where you can create your own charts. But you should read this thread where we discussed implied financing rates.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

LTCM wrote: Wed Jun 08, 2022 6:20 pm The current IRR is listed on the CME website. If you have a link to the paper I'll take a look. I've read the one for equities but not treasuries.
Can you please link to the page? I can't find the IRR on the treasury analytics page.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

Sorry in the gym right now. It's on page 4 of this thread.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LTCM »

I'll post a better link when I get home but this has it https://www.cmegroup.com/tools-informat ... ytics.html
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

I see in table 5 from Barth and Kahn's hedge funds and the treasury cash-futures disconnect paper (linked in this thread, but here it is again: https://papers.ssrn.com/sol3/papers.cfm ... id=3817544):

1992-2020 Difference between the bill yield and implied futures yield for 2 year treasury note futures: 0.138 for the first roll, -0.206 for the second roll

1992-2020 Difference between the bill yield and implied futures yield for 5 year treasury note futures: -0.165 for the first roll, -0.257 for the second roll

1992-2020 Difference between the bill yield and implied futures yield for 10 year treasury note futures: -0.239 for the first roll, -0.454 for the second roll

1992-2020 Difference between the bill yield and implied futures yield for T bond futures: -0.043 for the first roll, -0.135 for the second roll.

All of these spreads are negative for the second roll (second to deliver futures contract) for nearly 30 years.

Take a look at figure 40 (final page) for the big picture (spread for second to deliver futures contracts.) Also, check out the figure on page 17 of the Understanding Treasury futures pdf:
https://www.cmegroup.com/education/file ... utures.pdf

It appears that shorting the basis can make money for significant periods of time. But don't count on it, obviously.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Dry-Drink »

Dry-Drink wrote: Thu Apr 14, 2022 12:21 pm I've stayed away from leveraging bonds (only stocks and commodities) for the past couple years because, with the yields where they were, my advisor's optimizer did not allocate to them (it wasn't in his efficient frontier so-to-speak). Kudos to all of you who did, you have nerves of steel to buy into bonds when they had such low yields (I see this thread started basically at the yield trough).

But at this point, my advisor has, for the first, recommended an allocation to treasury futures although he says it is not a slam-dunk (due to the substantial loading on negative trend) and ultimately up to me. Would you peeps recommend opening some exposure to treasuries at this point or perhaps wait a bit more? I don't like to time the market but recognize momentum is a well-know out-of-sample phenomenon and concerns me right now.

Thanks friends.
Since I asked the above two months ago, LT bonds are down about 5% so I'm glad I didn't take the plunge then. I don't think the Fed will actually raise short term rates that much (the terminal rate is somewhere in the 2-3%) so with long-term rates at the 3% mark and higher, this is finally a time where I do see bonds having at least some positive premium for a buy-and-holder. The more LT rates rise, the higher that premium hopefully would be because the short-term rates really should stay anchored around the terminal rate. That gives me conviction to hold against further losses than I wouldn't have had before.

I decided this was a good a time as any to finally plunge into some treasury futures. They still have some negative trend but I'd rather be a little early than late. And conviction, especially from a psychological perspective, I think is really important and I finally have some of that.

Glad to be joining all other peeps on this ^_^
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by muffins14 »

Dry-Drink wrote: Fri Jun 10, 2022 12:31 am
Glad to be joining all other peeps on this ^_^
Welcome! Looking forward to losing money together :sharebeer

I just keep holding and rolling because I ask myself: if I had an $XM portfolio at 70/30 now, would I sell the bonds to be 100/0? I think the answer is no, so I’ll keep holding futures and watching my cash drain away. Good times
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Dry-Drink »

muffins14 wrote: Fri Jun 10, 2022 1:54 am
Dry-Drink wrote: Fri Jun 10, 2022 12:31 am
Glad to be joining all other peeps on this ^_^
Welcome! Looking forward to losing money together :sharebeer

I just keep holding and rolling because I ask myself: if I had an $XM portfolio at 70/30 now, would I sell the bonds to be 100/0? I think the answer is no, so I’ll keep holding futures and watching my cash drain away. Good times
Lmao.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by muffins14 »

Dry-Drink wrote: Fri Jun 10, 2022 10:10 am
Indeed. My futures are down another 4.3k so far today since I assume rate hike expectations are changing per the inflation news
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by kolder »

unemployed_pysicist wrote: Thu Jun 09, 2022 3:53 pm All of these spreads are negative for the second roll (second to deliver futures contract) for nearly 30 years.

Take a look at figure 40 (final page) for the big picture (spread for second to deliver futures contracts.) Also, check out the figure on page 17 of the Understanding Treasury futures pdf:
https://www.cmegroup.com/education/file ... utures.pdf
Correct me if I'm wrong but both of these sources are showing that the borrowing rate on treasury futures over the last ~30 years (12 years for the CME article) has been less than t-bills correct? Notably they were more like ~+10 bps in the last 10 years but still, that's quite good if true. Probably wouldn't count on it being negative as you said, but maybe assuming 20-30 bps over t-bills is too aggressive of an assumption?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

kolder wrote: Fri Jun 10, 2022 6:51 pm
Correct me if I'm wrong but both of these sources are showing that the borrowing rate on treasury futures over the last ~30 years (12 years for the CME article) has been less than t-bills correct? Notably they were more like ~+10 bps in the last 10 years but still, that's quite good if true. Probably wouldn't count on it being negative as you said, but maybe assuming 20-30 bps over t-bills is too aggressive of an assumption?
I made the same conclusion. Maybe someone will tell us why we are wrong.

I would not necessarily assume 20-30 bps moving forward; that number may be too aggressive but it could also be too small. In figure 2 of Barth Kahn, the spread between the T bond futures implied yield and the 3 month T bill over certain periods in the early 1980s looks enormous. Granted, there was probably significant risk in shorting the basis at that time, but the basis trader got paid to do it. I think regime matters and it is important to keep track of the implied repo rate to have an understanding of what's going on in these markets.

20-30 bps over T bills does not seem to comport with the past 30 years for any of the treasury futures contracts, at any rate.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by unemployed_pysicist »

LTCM wrote: Tue Jun 07, 2022 11:15 pm
Sharpe ratios since 1950 (including the T-bill financing needed to balance the risk)
LTT 0.22
ITT 0.25
STT 0.36

There's a strong STT advantage in both cases if you can leverage STT at the T-Bill rate.
I can only go back to 1964 with the Gurkaynak Sack Wright data, which uses the Nelson Siegel Svensson fit to the yield curve of off the run treasuries, but I find a similar advantage with STT over ITT from 1964-2021 (assuming you can leverage at the T-bill rate.)
*Apparently going back to June 1961 is possible here, but not shown in the plots below.

Here is the result of 1964-2021 in visual form:

Image

I use monthly leverage rebalance, financed at the T bill rate. The 2 year note is leveraged to match the modified duration of the 4.4 year note. The notes are held for 1 business quarter before rolling to the next 2 year note/4.4 year note. On the turn of the quarter, I leave one day for settlement, so there is one trading day per quarter where nothing happens.

Here is the telltale chart:

Image

STT outperformance seems to have trended downward since the financial crisis.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

Looks like this will be the second time I need to rebalance leverage in my Roth IRA account due to margin requirements. Seeing my net worth go down has been annoying, but I know that’s short-term. Having to rebalance in my Roth is extra annoying since I can’t offset that with more contributions.

My target AA is 98% US equities, 42% international equities, 120% ITT. Currently, my overall portfolio is 107/53/142, and my Roth account is 118/71/208 (higher leverage due to other accounts without access to leverage).
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

millennialmillions wrote: Sun Jun 12, 2022 8:48 pm Looks like this will be the second time I need to rebalance leverage in my Roth IRA account due to margin requirements. Seeing my net worth go down has been annoying, but I know that’s short-term. Having to rebalance in my Roth is extra annoying since I can’t offset that with more contributions.

My target AA is 98% US equities, 42% international equities, 120% ITT. Currently, my overall portfolio is 107/53/142, and my Roth account is 118/71/208 (higher leverage due to other accounts without access to leverage).
Very reasonable allocation!
"higher leverage due to other accounts without access to leverage" - I assume your target allocation and rebalancing are based on the sum of value of the accounts and the sum of the value of the asset classes of all accounts that are "covered" by your leverage in this one account? And that the account types are the same (Roth IRA or Roth 401k)? Skier demonstrated a few times that implementing (m)HFEA in a single account isolated would be suboptimal.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

comeinvest wrote: Mon Jun 13, 2022 3:45 am
Very reasonable allocation!
"higher leverage due to other accounts without access to leverage" - I assume your target allocation and rebalancing are based on the sum of value of the accounts and the sum of the value of the asset classes of all accounts that are "covered" by your leverage in this one account? And that the account types are the same (Roth IRA or Roth 401k)? Skier demonstrated a few times that implementing (m)HFEA in a single account isolated would be suboptimal.
Yes, this Roth IRA account has higher leverage to achieve my target AA when adding across my entire portfolio. However, this rebalancing is forced by margin requirements and is not part of my original plan, which was to rebalance annually. My taxable account on portfolio margin is fine, but the IRA margin requirements are significantly stricter.

I didn’t get around to rebalancing last night and had auto liquidation by IBKR. They sold 1 MES future to bring me back into compliance. I’m going to rearrange some things to rebuy that MES and lower my international and ITT exposure a bit instead.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

millennialmillions wrote: Mon Jun 13, 2022 6:55 am
comeinvest wrote: Mon Jun 13, 2022 3:45 am
Very reasonable allocation!
"higher leverage due to other accounts without access to leverage" - I assume your target allocation and rebalancing are based on the sum of value of the accounts and the sum of the value of the asset classes of all accounts that are "covered" by your leverage in this one account? And that the account types are the same (Roth IRA or Roth 401k)? Skier demonstrated a few times that implementing (m)HFEA in a single account isolated would be suboptimal.
Yes, this Roth IRA account has higher leverage to achieve my target AA when adding across my entire portfolio. However, this rebalancing is forced by margin requirements and is not part of my original plan, which was to rebalance annually. My taxable account on portfolio margin is fine, but the IRA margin requirements are significantly stricter.

I didn’t get around to rebalancing last night and had auto liquidation by IBKR. They sold 1 MES future to bring me back into compliance. I’m going to rearrange some things to rebuy that MES and lower my international and ITT exposure a bit instead.
I think tighter rebalancing bands are inevitable if only a subset of the portfolio is marginable.
Was your margin violation in the securities or in the commodities segment? I recently got a 2-day margin call i.e. with 2 days to remove the margin violation before liquidation from IB for violations in the commodities segment. There were enough funds in the securities segment to cover the violation. I called IB and they said they have to send the margin call just for compliance, even though I don't have to do anything. Because the email is an actual margin call with a deadline, I'm a bit confused if this would lead to immediate liquidation if I didn't have enough funds in the securities segment.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by millennialmillions »

comeinvest wrote: Mon Jun 13, 2022 7:34 am
I think tighter rebalancing bands are inevitable if only a subset of the portfolio is marginable.
Was your margin violation in the securities or in the commodities segment? I recently got a 2-day margin call i.e. with 2 days to remove the margin violation before liquidation from IB for violations in the commodities segment. There were enough funds in the securities segment to cover the violation. I called IB and they said they have to send the margin call just for compliance, even though I don't have to do anything. Because the email is an actual margin call with a deadline, I'm a bit confused if this would lead to immediate liquidation if I didn't have enough funds in the securities segment.
I'm talking about my Roth IRA account. Since you can't use margin for IRA accounts, it's the commodities side that came into violation from not having enough cash available due to a combination of my futures margin requirements and the equity ETFs I hold.

I did receive a warning when I was very close to the margin requirement. Here is the warning I received:
Following violation(s) have been detected for you account U****: - Excess Liquidity: ALERT: Your account, while currently margin compliant, maintains qualifying equity (i.e., Equity with Loan Value) at a level only 10% above that which is required. Please note that we do not issue margin calls and should this cushion erode and your account no longer remain margin compliant, it will be subject to forced position liquidations. To ensure continued compliance, please consider depositing additional funds to increase equity and/or closing or hedging positions to lessen margin exposure.
And here is the notice I received once liquidation occurred:
This is to inform you that Interactive Brokers liquidated certain positions in your account U**** because there was insufficient equity in your account to satisfy the maintenance margin requirements for your portfolio.


The liquidating trades were as follows:

ACTION SYMBOL EXCHANGE QTY PRICE CURRENCY DATE/TIME
Sold MESU2 GLOBEX 1.0 3813.25 USD 2022-06-13 04:03:29 EDT

In order to protect our customers and the firm, it is IBKR's policy to liquidate positions in undermargined portfolios, as specified in the IBKR Customer Agreement and on the IBKR website. To avoid liquidation trades in the future, please monitor the margin status of your account at all times and deposit additional funds, or reduce your positions, when necessary. For more information about IBKR's margin requirements, please visit the IBKR website .
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by Dry-Drink »

Ufff there really is nothing that makes you feel as alive as waking up to the fresh smell of margin calls and liquidation amIrightfellas?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by impatientInv »

Are some of using TLT LEAP options vs treasury futures? Surely Treasury futures are much more liquid, but inside an IRA it get so hard to rebalance with a drawdown. Is there ITT options that one has used?

Here is something from searching previous posts..
EfficientInvestor wrote: Wed Sep 23, 2020 2:43 pm
guyinlaw wrote: Wed Sep 23, 2020 12:01 pm How is your experience with Tastyworks? I am trying to figure of whether to go with IBKR or TastyWorks.

What kind of futures do you own in IRA? I am planning go < 2x leverage in stocks and maybe Treasury futures/ Gold later on. Main aim is to get 1.5x to 2x exposure to stocks. How do you think best way to implement this would be?

I have futures in taxable right now.
I really like TastyWorks (TW). The user interface is much better than IBKR. My only gripe regarding trading futures with TW is that you can't roll futures contracts on the app or on their web portal. You can only submit a roll order on their desktop software application. They also don't have as large a variety of available futures contracts as IBKR, but they probably cover everything you may need.

Within my IRA, I currently use /MES, /M2K, and /MGC. I was using /ZT and /ZN through the first half of the year. However, I'm not using any bond futures right now because of the current rate situation. Since short and intermediate rates are so low, I'm choosing to use long term treasuries and just sticking with TLT instead of using long term treasury futures. If I'm ever in a situation where I want leverage on long term treasuries, I just prefer to buy long-dated ITM call options on TLT because it has downside protection baked in to hedge against a spike in interest rates.

If you are looking to do 2X exposure to stocks, I would personally not go just straight futures. I would either buy an ITM call option in order to have some downside protection to protect against the risk of ruin. Alternatively, you could buy futures and then hedge them with a put option. The benefit of doing it this way is that put options tend to be more liquid at similar levels than ITM call options. Therefore, you don't have to worry as much about a wide bid/ask spread and getting a bad fill. I'll also note that /MES just came out with options. So if you want to sell covered calls against some of your /MES holdings in order to fund the purchase of puts on SPY or SPX, you can now do that.

I'm not a fan of futures in taxable due to the tax treatment. I prefer getting ITM call options (delta around 80) 2 years out and then holding them for at least 1 year. I can then roll them after holding them for a year and only have to pay long term capital gains tax. I also usually sell monthly call options against my ITM long positions in order to offset the premium I'm paying out for the long positions. I usually sell 1 option for every 3 or 4 long options that I own. Just trying to stay theta neutral.
No individual stocks.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by EfficientInvestor »

impatientInv wrote: Wed Jun 15, 2022 2:17 pm Are some of using TLT LEAP options vs treasury futures? Surely Treasury futures are much more liquid, but inside an IRA it get so hard to rebalance with a drawdown. Is there ITT options that one has used?
I use options on TLT and I have used treasury futures. Either product can help you get the nominal exposure you are targeting. The big difference though is that futures are just providing the leverage whereas options provide leverage while also providing insurance. So you have to determine whether you want insurance in addition to the leverage. TLT is the only treasury etf I trade options on due to limited liquidity in other durations such as SHY and IEF. If I want to buy exposure at the shorter end of the yield curve but still want the downside protection of options, I may buy my long exposure using /ZF or /ZT and then hedge it by buying put options on TLT but do so while accounting for duration differences. For instance (using very round numbers), I may go long $400k worth of /ZF (5-year treasury) and then hedge it buy buying an amount of TLT (20 yr) put options that I would have purchased if I was long $100k worth of TLT. I then sell monthly call options against my /ZF holdings in an amount that helps me stay theta neutral.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

EfficientInvestor wrote: Wed Jun 15, 2022 3:05 pm
impatientInv wrote: Wed Jun 15, 2022 2:17 pm Are some of using TLT LEAP options vs treasury futures? Surely Treasury futures are much more liquid, but inside an IRA it get so hard to rebalance with a drawdown. Is there ITT options that one has used?
I use options on TLT and I have used treasury futures. Either product can help you get the nominal exposure you are targeting. The big difference though is that futures are just providing the leverage whereas options provide leverage while also providing insurance. So you have to determine whether you want insurance in addition to the leverage. TLT is the only treasury etf I trade options on due to limited liquidity in other durations such as SHY and IEF. If I want to buy exposure at the shorter end of the yield curve but still want the downside protection of options, I may buy my long exposure using /ZF or /ZT and then hedge it by buying put options on TLT but do so while accounting for duration differences. For instance (using very round numbers), I may go long $400k worth of /ZF (5-year treasury) and then hedge it buy buying an amount of TLT (20 yr) put options that I would have purchased if I was long $100k worth of TLT. I then sell monthly call options against my /ZF holdings in an amount that helps me stay theta neutral.
Sounds like a complex strategy. How do you know that you still earn a term premium (if that is your goal as you are on the mHFEA thread), after you pay the cost of the put options?
If your idea is to hedge against rising interest rates with the put options (I'm just speculating), than it sounds like you are implementing a hedge to the hedge - where the first hedge is the treasuries exposure to hedge against stock market crashes, and the treasury put options would hedge the treasuries against rising rates. Am I seeing this correctly?
When interest rates don't rise a lot, then you would pay a performance drag with the put options.
Did you backtest this whole thing and compare to a simpler strategy without options? Or to a simple stock/bond strategy with a little less leverage? Do the put options smooth the chart or lessen maximum drawdowns, and what is the risk-adjusted return?
Also, why don't you use put options on /ZF instead? I'm sure you would also get a margin offset that way.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by EfficientInvestor »

comeinvest wrote: Thu Jun 16, 2022 12:12 am Sounds like a complex strategy. How do you know that you still earn a term premium (if that is your goal as you are on the mHFEA thread), after you pay the cost of the put options?
If your idea is to hedge against rising interest rates with the put options (I'm just speculating), than it sounds like you are implementing a hedge to the hedge - where the first hedge is the treasuries exposure to hedge against stock market crashes, and the treasury put options would hedge the treasuries against rising rates. Am I seeing this correctly?
When interest rates don't rise a lot, then you would pay a performance drag with the put options.
Did you backtest this whole thing and compare to a simpler strategy without options? Or to a simple stock/bond strategy with a little less leverage? Do the put options smooth the chart or lessen maximum drawdowns, and what is the risk-adjusted return?
Also, why don't you use put options on /ZF instead? I'm sure you would also get a margin offset that way.
Yes, it is a bit complex. I still earn term premium because I still have exposure to the underlying in an amount equal to the delta value of my total position. The complex part is that the delta value changes day to day. If I start out with a net delta of 70, then my position moves 0.70 for every 1.00 move in the underlying. If the underlying goes down a decent amount (like this year), then my position may move to a net delta of 30. In that case, I have less term exposure than when I started. But that also means that the hedge is protecting from further loss. In an up year, my net delta might become 90 or more. In that case, the hedge has diminished. I think the trickiest part is to know when to rebalance and get back to original target delta. I concluded that it's best to just rebalance at regular intervals like you would with any portfolio.

I agree there is a performance drag from buying the put options due to the premium decay. However, theta decays faster on shorter term options than on longer term options. So by buying long term options (or buying the underlying and buying long term puts) and selling monthly call options, I am able to stay theta neutral by selling the call options against only about 25% of the position. So this covers the potential performance of 25% of the position but the remaining portion is free to run. I don’t buy puts on /ZF because there is limited availability of liquid options that are 1+ year out in time.

It is very difficult to backtest this given the complexity. I am doing this kind of hedging strategy on every asset, not just bonds, so that adds to the complexity. However, I have been more accurately tracking my performance on this strategy since I started using Interactive Brokers in Dec 2019. Since 12/19/19, my Sharpe ratio on my more aggressive portfolio that targets stock-like volatility has been 0.75 vs a Sharpe ratio of 0.33 for 100% VT and 0.40 for 60% VT/40% BND. Over that time, if I had been doing the base allocation without hedges, I assume my Sharpe Ratio would have been something less than either 0.33 or 0.4 due to the poor performance of TLT. So I would say the hedging strategy has improved the risk-adjusted return. The max drawdown is currently in progress and is at -28.5%. Not surprising given almost every asset is down. Without the hedges, I assume the drawdown on my portfolio would currently be over 30%. The hedge has been kicking in more recently as many of the hedges are now in the money. The max drawdown during COVID was -25%.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

Here are the current dot plot and the yield curve. ITT yield ca. 3.5%, while the 3+ year dot plot is at ca. 2.5%. If we give any credibility to the dot plot, what implications might we be able to draw for the expected term premia of ITT ?

Image

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

Post by LazyOverthinker »

Edit: Changed my opinion. Small-cap value stocks + bonds looks like much stronger combo than low-volatility stocks + bonds. Low-volatility stocks correlate with bonds much more than SCV. Plus, SCV does well during rate-hikes.
Last edited by LazyOverthinker on Wed Jul 20, 2022 2:46 am, edited 2 times in total.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

Edit: Changed my opinion. Small-cap value stocks + bonds looks like much stronger combo than low-volatility stocks + bonds. Low-volatility stocks correlate with bonds much more than SCV. Plus, SCV does well during rate-hikes.
Last edited by LazyOverthinker on Wed Jul 20, 2022 2:46 am, edited 1 time in total.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by perfectuncertainty »

LazyOverthinker wrote: Fri Jun 24, 2022 11:10 pm Wow, finally caught up! Amazing thread, and quite a mental workout :beer. @comeinvest, I do apologize for changing topics as I don't have an answer to your question...

I'd like to discuss a few possible diversification "tilts" for this strategy's currently-occurring weakness of unexpected inflation and rate-hikes. Firstly, I think a 10% allocation to gold is always worth looking at in any leveraged portfolio... yes, it does not "produce value" in an unleveraged account, but 10% allocation seems to help in every leverage-threatening drawdown.

But gold is actually not a great "direct" inflation hedge for many complicated reasons that we don't have to re-hash here. TIPS, on the other hand, have shown themselves to carry more interest-rate risk than inflation-hedging properties, and we already have plenty of interest-rate risk. Commodities seem to be the only asset that directly responded to this unexpected inflation in a drawdown-alleviating-capacity, but pure commodities have nauseatingly weak (close to zero) returns as discussed earlier. My suggestion (for a globally diversified portfolio) is to take half of our US-equities allocation and split that amount among commodity-linked sectors: agriculture, energy, and consumer staples (I'm open to any other suggestions that would diversify this "tilt" away from overfitting).

Here is an example - portfolio 2 features the tilts at the bottom: https://www.portfoliovisualizer.com/bac ... on10_2=3.5

Using only monthly data, you can see it reduced drawdown by 2.5%. Using Google finance's daily data, the real drawdown numbers are closer to 9.3% / 13.8%, with and without sector tilts respectively. An interesting follow-up question for me is "what if stocks tanked 50% instead of 20%?" Then you'd be looking at drawdown differences of 18.5% and 22.5%, which could make or break leverage.

Finally, here's a sloppy attempt at backtesting this to 1998 with "ADM" in place of "FPI" (neither are perfect agriculture diversifiers): https://www.portfoliovisualizer.com/bac ... on10_2=3.5

Again, this doesn't show how rough 2008 would have actually been. Daily google data shows that having this inflation-resistant tilt would have increased your max drawdown from 16.66~% to 20~%, maybe even 22~%. Perhaps there's a way to refine it so that we can plan around 20% max drawdown in either scenario, or maybe I'm wasting time overfitting for recent events ("wow incredible you saw that oil and food became more expensive when there was a war causing oil and food shortages"). I find it hard to intuit if "commodities as an inflation hedge" can be teased apart from recent events as a whole.

Last but not least, earlier in this thread it was asserted that an Emerging markets + SCV tilt would hold up better during inflation (due to these factors naturally tilting towards commodities), and this has proven to be true with reduced drawdowns in the range of 2-5%. Perhaps we should forget my nonsense about sector tilts and seriously increase emerging + SCV? This definitely would have diminishing returns (I've read that even the Fama-academic types acknowledge 20%~ SCV tilt to be an optimal upper bound), so I still like balancing such an idea with sector tilts. Also, Emerging + SCV would have increased the 2008 drawdown... huh... noticing a pattern here... but there's gotta be a goldilocks zone!

To clarify: I'm trying to optimize for the earlier-discussed "no rebalancing of leverage" strategy mentioned earlier, as I think minimizing volatility decay is one of the main edges mHFEA has over HFEA.
Why are you trying to optimize a portfolio with a 4.5% return?
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

perfectuncertainty wrote: Sat Jun 25, 2022 1:02 pm Why are you trying to optimize a portfolio with a 4.5% return?
Same as anyone here, I'm trying to lever up a diversified portfolio with a high sharpe ratio. I see you post in HFEA threads so there must be some confusion, perhaps you only looked at the first PV link? In the 2nd PV link, my hypothesized portfolio has a higher CAGR than 33% VFINX and 67% VFITX(the basis of this thread) since 1998, and is more diversified. It has 0.8% less CAGR than the HFEA ratio of 55% VFINX and 45% VUSTX with much less drawdown.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

Edit: Changed my opinion. Small-cap value stocks + bonds looks like much stronger combo than low-volatility stocks + bonds. Low-volatility stocks correlate with bonds much more than SCV. Plus, SCV does better during rate-hikes.
Last edited by LazyOverthinker on Wed Jul 20, 2022 2:48 am, edited 1 time in total.
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by perfectuncertainty »

LazyOverthinker wrote: Sat Jun 25, 2022 5:12 pm
perfectuncertainty wrote: Sat Jun 25, 2022 1:02 pm Why are you trying to optimize a portfolio with a 4.5% return?
Same as anyone here, I'm trying to lever up a diversified portfolio with a high sharpe ratio. I see you post in HFEA threads so there must be some confusion, perhaps you only looked at the first PV link? In the 2nd PV link, my hypothesized portfolio has a higher CAGR than 33% VFINX and 67% VFITX(the basis of this thread) since 1998, and is more diversified. It has 0.8% less CAGR than the HFEA ratio of 55% VFINX and 45% VUSTX with much less drawdown.
I think you might want to verify your starting year and add the Vanguard 500 as a benchmark. The benchmark will have higher drawdowns but in some cases a much higher return (over 100% higher). Start in 2003, 2009 etc.
LazyOverthinker
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

deleted
Last edited by LazyOverthinker on Wed Jul 20, 2022 2:48 am, edited 1 time in total.
LazyOverthinker
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by LazyOverthinker »

Edit: Changed my opinion. Small-cap value stocks + bonds looks like much stronger combo than low-volatility stocks + bonds. Low-volatility stocks correlate with bonds much more than SCV. Plus, SCV does better during rate-hikes.
Last edited by LazyOverthinker on Wed Jul 20, 2022 2:48 am, edited 1 time in total.
mmKay
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by mmKay »

comeinvest wrote: Sun Jun 05, 2022 4:43 am I'm not sure if I understand your strategy. I'm also not sure if you understand the pricing of treasury futures. I'm not sure if "contango" is a signal of mispricing or trading opportunity.

I currently still have positions that bet in a duration-neutral way on the disappearance of the current zig-zag in the U.S. yield curve. (In short words, short the troughs and long the peaks.) I got burned so far, as the zig-zag intensified. So if you start a position now, you might get some good risk/return premium as the zig-zag is quite big and not very common historically. My strategy is an overlay over mHFEA in hope to extract a risk premium from anomalies in the slope of the curve that is relatively independent from both equity and interest rate risk (interest rate risk = parallel shifts of the yield curve). The more independent sources of return the better.

You can also read the papers on carry return investing on the yield curve. You could backtest a long/short strategy as an overlay or extension of the mHFEA backtesting. mHFEA suggests a preference for ITT vs LTT, but is basically limited to long futures positions. We could generalize the optimization problem by allowing both long and short positions on the yield curve (for example long ZF, short UB as UB is hated in the mHFEA thread as it historically had lower return per duration risk than ZF). Nothing indicates that the optimal solution of the optimization problem with only positive positions (for example 170% ITT / 140% equities) is the optimal global solution that allows short positions.
Thank you for your response. Any expected price change from roll from peaks and troughs / zigs and zags should be included in the difference between the spot price and the price of the futures contract, right? (That is, along with carry and cost of borrowing.)

Thank you for suggesting papers on carry return investing. I found this, and it looks like what I am doing is similar to it:
https://www.cfainstitute.org/en/researc ... ield-curve

I haven't looked at backtesting, but it might be something worth exploring in a weeking project. I'm relying instead on the research on bet against beta, and this seems like a smart way to do it.
comeinvest
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Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Post by comeinvest »

mmKay wrote: Mon Jun 27, 2022 3:03 am
comeinvest wrote: Sun Jun 05, 2022 4:43 am I'm not sure if I understand your strategy. I'm also not sure if you understand the pricing of treasury futures. I'm not sure if "contango" is a signal of mispricing or trading opportunity.

I currently still have positions that bet in a duration-neutral way on the disappearance of the current zig-zag in the U.S. yield curve. (In short words, short the troughs and long the peaks.) I got burned so far, as the zig-zag intensified. So if you start a position now, you might get some good risk/return premium as the zig-zag is quite big and not very common historically. My strategy is an overlay over mHFEA in hope to extract a risk premium from anomalies in the slope of the curve that is relatively independent from both equity and interest rate risk (interest rate risk = parallel shifts of the yield curve). The more independent sources of return the better.

You can also read the papers on carry return investing on the yield curve. You could backtest a long/short strategy as an overlay or extension of the mHFEA backtesting. mHFEA suggests a preference for ITT vs LTT, but is basically limited to long futures positions. We could generalize the optimization problem by allowing both long and short positions on the yield curve (for example long ZF, short UB as UB is hated in the mHFEA thread as it historically had lower return per duration risk than ZF). Nothing indicates that the optimal solution of the optimization problem with only positive positions (for example 170% ITT / 140% equities) is the optimal global solution that allows short positions.
Thank you for your response. Any expected price change from roll from peaks and troughs / zigs and zags should be included in the difference between the spot price and the price of the futures contract, right? (That is, along with carry and cost of borrowing.)

Thank you for suggesting papers on carry return investing. I found this, and it looks like what I am doing is similar to it:
https://www.cfainstitute.org/en/researc ... ield-curve

I haven't looked at backtesting, but it might be something worth exploring in a weeking project. I'm relying instead on the research on bet against beta, and this seems like a smart way to do it.
"zigs and zags should be included in the difference between the spot price and the price of the futures" - not sure what you mean. I think the zig-zag would apply to both the futures and the treasuries yields, and has nothing to do specifically with futures. There is a no-arb relation between the futures and the underlying (CTD) treasuries that probably holds very accurately most of the time.

Be careful: the 7y-10y inversion for example is probably in part a result of a "spillover effect" and reflects an expected peak fed fund rates in a year or two of close to 4%, which then go back down to close to 3%. You can look at the SOFR futures curve for example if you want to have a grasp of market expectations of interest rates. (I have all the SOFR futures in a watchlist in IBKR.) The SOFR curve is monotonically increasing in the 7-10y area. The treasuries (and treasury futures) should be sort of a mathematical integral or average over the expected short-term rates from zero to maturity ("expectations hypothesis"), plus a term premium, i.e. the 7y treasury rate will reflect more "spillover" (my own words) from the SOFR peak in the 1-2y area than the 10y treasury does. Both SOFR and treasury futures should reflect the same term premia. I personally did the math in my head and I still think the 10y treasury is mispriced i.e. the rate too low vs. the 7y treasury based on the SOFR curve, but maybe I'm not getting it. Feel free to verify and let me know what you find.
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