HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by skierincolorado »

unemployed_pysicist wrote: Sun Sep 11, 2022 2:50 pm
skierincolorado wrote: Sat Sep 10, 2022 10:04 am I would not touch edv. Much more risk than vglt, but only slightly more return.
EDV and VGLT had virtually the same Sharpe ratio from February 2010 until August 2022.
That's because long term interest rates fell dramatically over that period.
There are share classes that have been around longer. If you start in 2009 (dec 31 2008) you get a period of neae neutral rates. During this period the sharpe ratio is much higher for vglt than edv .26 vs .18.

Any period in which rates don't fall, the sharpe for vglt will be much higher. Over long time periods like 30 or 50 years this matters less (even if rates fall they are falling less per year).
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

skierincolorado wrote: Sun Sep 11, 2022 7:44 pm
unemployed_pysicist wrote: Sun Sep 11, 2022 2:50 pm
skierincolorado wrote: Sat Sep 10, 2022 10:04 am I would not touch edv. Much more risk than vglt, but only slightly more return.
EDV and VGLT had virtually the same Sharpe ratio from February 2010 until August 2022.
That's because long term interest rates fell dramatically over that period.
There are share classes that have been around longer. If you start in 2009 (dec 31 2008) you get a period of neae neutral rates. During this period the sharpe ratio is much higher for vglt than edv .26 vs .18.

Any period in which rates don't fall, the sharpe for vglt will be much higher. Over long time periods like 30 or 50 years this matters less (even if rates fall they are falling less per year).
Kevin posted an instructive version of the current yield curve here: viewtopic.php?p=6864345#p6864345

If you do a back-of-the-envelope calculation of the current carry (instantaneous return assuming a static yield curve) of the 30y (or the 30y futures which are at the 25y point on the yield curve) with the negative slope, you will see that the carry is abysmal, even compared to the 20y for example.
unemployed_pysicist
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by unemployed_pysicist »

skierincolorado wrote: Sun Sep 11, 2022 7:44 pm
That's because long term interest rates fell dramatically over that period.
There are share classes that have been around longer. If you start in 2009 (dec 31 2008) you get a period of neae neutral rates. During this period the sharpe ratio is much higher for vglt than edv .26 vs .18.

Any period in which rates don't fall, the sharpe for vglt will be much higher. Over long time periods like 30 or 50 years this matters less (even if rates fall they are falling less per year).
Which share class? VGLSX does not seem to go back any further than VGLT. Comparing VEDTX (EDV) and TLT as another comparison gives a similar Sharpe ratio of about 0.31 for TLT and 0.3 for VEDTX from Dec 2007 to present (almost 15 years.)

Perhaps you are referring to VUSTX? VUSTX is actively managed and different holdings so not the same as VGLT. Even then the Sharpe is .34 for VUSTX vs .3 for VEDTX from Dec 2007 to present.
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unemployed_pysicist
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by unemployed_pysicist »

comeinvest wrote: Sun Sep 11, 2022 9:02 pm
Kevin posted an instructive version of the current yield curve here: viewtopic.php?p=6864345#p6864345

If you do a back-of-the-envelope calculation of the current carry (instantaneous return assuming a static yield curve) of the 30y (or the 30y futures which are at the 25y point on the yield curve) with the negative slope, you will see that the carry is abysmal, even compared to the 20y for example.
Yes, I am aware.

There is, of course, more to the near-term expected return than the yield income and roll down return. I like Antti Ilmainen's relatively straightforward approach for this (I have not calculated it for these maturities and I would not be completely surprised if near term expected return is lower for the 25y as compared to the 20 year.)

If I were feeling brave, I would go long on the 2 or 3 year right now. I don't have the conviction for it yet.
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am
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by am »

I think I’m going to quit this strategy with a loss. Too much risk at this point with inflation running high. Who knows where interest rates will end up? If they go much higher, TMF may be near zero :shock: UPRO may not be too far behind in this case.

Plus, the pay off of this strategy being successful may be years down the line when I won’t need the money much or worse…

On the other hand, we may be setting up for an 80s-90s type of run where interest rates get to a high level and then fall over the subsequent decades and lead to large stock and bond gains.

Anyones crystal ball working well this morning ?
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Marseille07 wrote: Sun Sep 11, 2022 3:25 pm
perfectuncertainty wrote: Sun Sep 11, 2022 3:20 pm Perhaps a lesson that should be learned from HFEA is that looking at short-term history (like 36 months of correlation) is great until it isn't. Unless one has a way to know when the trends actually change.
? Easy, look at the yield curve having some room to go down. It's no secret when the NAV of bonds increases or decreases.

Those who loaded up LTTs when the yield was 0.5% can't complain that the hedge isn't working.
This is my perspective as well. HFEA's strategy is going aggressive on S&P while aggressively using the FED rates as cover.

If there's no cover, you're just unprotected 3x S&P leverage with TMF acting as extra downside on top of that.

I would personally not be in HFEA if fed funds target is less than 2%..
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Mon Sep 12, 2022 9:05 am This is my perspective as well. HFEA's strategy is going aggressive on S&P while aggressively using the FED rates as cover.

If there's no cover, you're just unprotected 3x S&P leverage with TMF acting as extra downside on top of that.

I would personally not be in HFEA if fed funds target is less than 2%..
It's not just HFEA, even the SPY/BND portfolio works similarly.

All this "correlation" talk is nonsense. With bonds, how much air they have is always known in advance by a form of yields. The yields basically tell how expensive bonds are, but I think what trips up people is that you have to look at it in reverse (low = expensive, high = cheap).
Last edited by Marseille07 on Mon Sep 12, 2022 1:12 pm, edited 1 time in total.
er999
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by er999 »

am wrote: Mon Sep 12, 2022 8:17 am I think I’m going to quit this strategy with a loss. Too much risk at this point with inflation running high. Who knows where interest rates will end up? If they go much higher, TMF may be near zero :shock: UPRO may not be too far behind in this case.

Plus, the pay off of this strategy being successful may be years down the line when I won’t need the money much or worse…

On the other hand, we may be setting up for an 80s-90s type of run where interest rates get to a high level and then fall over the subsequent decades and lead to large stock and bond gains.

Anyones crystal ball working well this morning ?
How much to you have invested in it? Maybe cut back to one or two thousand so it’s small enough that if you lose it all it won’t effect you. It’s not like standard index funds where someone can say if you hold 20 years you’re likely to do well. On the other hand the point of maximum pessimism is the time to buy into these strategies not after they have made a bunch of money.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

unemployed_pysicist wrote: Mon Sep 12, 2022 2:34 am
comeinvest wrote: Sun Sep 11, 2022 9:02 pm
Kevin posted an instructive version of the current yield curve here: viewtopic.php?p=6864345#p6864345

If you do a back-of-the-envelope calculation of the current carry (instantaneous return assuming a static yield curve) of the 30y (or the 30y futures which are at the 25y point on the yield curve) with the negative slope, you will see that the carry is abysmal, even compared to the 20y for example.
Yes, I am aware.

There is, of course, more to the near-term expected return than the yield income and roll down return. I like Antti Ilmainen's relatively straightforward approach for this (I have not calculated it for these maturities and I would not be completely surprised if near term expected return is lower for the 25y as compared to the 20 year.)

If I were feeling brave, I would go long on the 2 or 3 year right now. I don't have the conviction for it yet.
What is his approach?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by unemployed_pysicist »

comeinvest wrote: Mon Sep 12, 2022 1:11 pm
What is his approach?
Expected return = Yield Income + Rolldown return + Value of Convexity + Expected capital gain loss from rate "view"

Yield Income and rolldown return is of course the carry. The value of convexity should also be included.

Value of convexity = 0.5 * convexity *(Vol(dy))^2,
where Vol(dy) is the yield volatility.
Antti Ilmainen wrote: For the rate view, Investors can replace an unchanged yield curve with some other rate (or spread) "view".
You can use market surveys or economist predictions (if you want) or input your own view if you have one. This term seems optional.

It is also possible to add an optional fifth term, which includes liquidity effects, financing advantage (Ilmainen gives "special" repo income that is common for on the runs as an example of this) and the cheapness measures: spread off the fitted curve and expected cheapening towards the fitted curve.

The ~20 year bonds are above the NSS fit, so maybe their spread above the fitted curve is a good input for the fifth term.

I am not sure if he has changed his approach over time. This is all from the report "Understanding the Yield Curve" that he wrote when he was working for Salomon Brothers in the 1990s.
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Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Are UPRO and TMF's expense ratios really ~1%??
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Mon Sep 12, 2022 3:19 pm Are UPRO and TMF's expense ratios really ~1%??
Yes. This strategy isn't exactly in-line with the BH philosophy.
Last edited by Marseille07 on Mon Sep 12, 2022 3:22 pm, edited 1 time in total.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Marseille07 wrote: Mon Sep 12, 2022 3:21 pm
Tamalak wrote: Mon Sep 12, 2022 3:19 pm Are UPRO and TMF's expense ratios really ~1%??
Yes.
OMG. I should have checked that first.

I'm not going on an adventure if the equipment is THAT expensive :D

I don't consider myself "a Boglehead", but I do consider myself a miser.
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Mon Sep 12, 2022 3:21 pm OMG. I should have checked that first.

I'm not going on an adventure if the equipment is THAT expensive :D
Well...1% isn't low, but long-term CAGR still beats 1x, which means the exp ratio doesn't matter too much in the grand scheme of things.

This is why I am amused by arguments claiming that passive beats active because of fees.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Marseille07 wrote: Mon Sep 12, 2022 3:23 pm
Tamalak wrote: Mon Sep 12, 2022 3:21 pm OMG. I should have checked that first.

I'm not going on an adventure if the equipment is THAT expensive :D
Well...1% isn't low, but long-term CAGR still beats 1x, which means the exp ratio doesn't matter too much in the grand scheme of things.

This is why I am amused by arguments claiming that passive beats active because of fees.
What is the reason for the 1% fees?

-Is it some innate and uncorrectable expense of the 3x fund like the cost of borrowing money?
-Is it some real but improvable expense such as the work involved in managing the fund (e.g. rebalancing daily)?
-Or are they just charging it because the market will bear it?
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Mon Sep 12, 2022 3:31 pm What is the reason for the 1% fees?

-Is it some innate and uncorrectable expense of the 3x fund like the cost of borrowing money?
-Is it some real but improvable expense such as the work involved in managing the fund (e.g. rebalancing daily)?
-Or are they just charging it because the market will bear it?
The last one. It's not so easy to create 3x ETFs these days so UPRO and SPXL have a monopoly on this so long as the investors still trade their products anyway.

1x ETFs are competing fiercely; if they charge high exp ratio then people just move to something lower.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Marseille07 wrote: Mon Sep 12, 2022 3:38 pm
Tamalak wrote: Mon Sep 12, 2022 3:31 pm What is the reason for the 1% fees?

-Is it some innate and uncorrectable expense of the 3x fund like the cost of borrowing money?
-Is it some real but improvable expense such as the work involved in managing the fund (e.g. rebalancing daily)?
-Or are they just charging it because the market will bear it?
The last one. It's not so easy to create 3x ETFs these days so UPRO and SPXL have a monopoly on this so long as the investors still trade their products anyway.

1x ETFs are competing fiercely; if they charge high exp ratio then people just move to something lower.
Hmm I see. Thank you.
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

unemployed_pysicist wrote: Mon Sep 12, 2022 2:53 pm
comeinvest wrote: Mon Sep 12, 2022 1:11 pm
What is his approach?
Expected return = Yield Income + Rolldown return + Value of Convexity + Expected capital gain loss from rate "view"

Yield Income and rolldown return is of course the carry. The value of convexity should also be included.

Value of convexity = 0.5 * convexity *(Vol(dy))^2,
where Vol(dy) is the yield volatility.
Antti Ilmainen wrote: For the rate view, Investors can replace an unchanged yield curve with some other rate (or spread) "view".
You can use market surveys or economist predictions (if you want) or input your own view if you have one. This term seems optional.

It is also possible to add an optional fifth term, which includes liquidity effects, financing advantage (Ilmainen gives "special" repo income that is common for on the runs as an example of this) and the cheapness measures: spread off the fitted curve and expected cheapening towards the fitted curve.

The ~20 year bonds are above the NSS fit, so maybe their spread above the fitted curve is a good input for the fifth term.

I am not sure if he has changed his approach over time. This is all from the report "Understanding the Yield Curve" that he wrote when he was working for Salomon Brothers in the 1990s.
Great information, thanks.

Can you please explain the meaning or importance of the "value of convexity" intuitively in layman terms please? Is it significant?

I'm not sure if I would trust "surveys" regarding the yields 20-30 years from now (or regarding just about anything else that far in the future), given that "experts" can't even predict seemingly much simpler things like imminent market crashes or near-term inflation or interest rates. The long term rates estimates are largely based on short-term rate expectation between now and the time far in the future (expectations hypothesis), which means they would depend on estimates of federal reserve policy, inflation, etc., for decades. Is there really any evidence that surveys are a serious approach?

I think the yield curve itself can be used to predict (curve implied) rate changes at a specific maturity.

I can't find the Ilmanen papers or books online and not even to buy, can you please let me know where to find them?
Last edited by comeinvest on Mon Sep 12, 2022 6:08 pm, edited 1 time in total.
chrisdds98
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

looks like tmf dropped into single digits in anticipation of the cpi tomorrow. really hope the fed gets this under control, its painful holding tmf!
am
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by am »

chrisdds98 wrote: Mon Sep 12, 2022 5:33 pm looks like tmf dropped into single digits in anticipation of the cpi tomorrow. really hope the fed gets this under control, its painful holding tmf!
Wonder if tmf will go near zero as we approach 4,5,6,7% interest if we get there?

Really on the cusp of abandoning this strategy. Wasn’t this the death knell of this strategy? Rising long dated bond yields and dropping stocks?

I get no one knows. This strategy has got to be super risky given the potential returns.
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

am wrote: Mon Sep 12, 2022 7:02 pm I get no one knows. This strategy has got to be super risky given the potential returns.
It's risky, but I think it is incorrect to think that risky strategies are profitable.
am
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by am »

Marseille07 wrote: Mon Sep 12, 2022 7:05 pm
am wrote: Mon Sep 12, 2022 7:02 pm I get no one knows. This strategy has got to be super risky given the potential returns.
It's risky, but I think it is incorrect to think that risky strategies are profitable.
I am saying that if potential returns can be big then there has to be enormous downside risk. In this case, tmf has a real chance of getting near zero. Maybe sooner then we think. Only reason I haven’t quit, is because I am often wrong :D
bgf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

am wrote: Mon Sep 12, 2022 7:02 pm
chrisdds98 wrote: Mon Sep 12, 2022 5:33 pm looks like tmf dropped into single digits in anticipation of the cpi tomorrow. really hope the fed gets this under control, its painful holding tmf!
Wonder if tmf will go near zero as we approach 4,5,6,7% interest if we get there?

Really on the cusp of abandoning this strategy. Wasn’t this the death knell of this strategy? Rising long dated bond yields and dropping stocks?

I get no one knows. This strategy has got to be super risky given the potential returns.
I think it’s path dependent, but an increase from here to 6% would not be as bad as what we had since the start of 2021.
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Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

am wrote: Mon Sep 12, 2022 7:26 pm I am saying that if potential returns can be big then there has to be enormous downside risk. In this case, tmf has a real chance of getting near zero. Maybe sooner then we think. Only reason I haven’t quit, is because I am often wrong :D
Gotcha. Yes, high return = high volatility is correct.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

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

Post by Tamalak »

When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
am
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by am »

Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
They do not. It was a risk explicitly stated in original post. Fed support for market was assumed. Risk has shown up. Tmf to zero may happen
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

unemployed_pysicist wrote: Mon Sep 12, 2022 2:09 am
skierincolorado wrote: Sun Sep 11, 2022 7:44 pm
That's because long term interest rates fell dramatically over that period.
There are share classes that have been around longer. If you start in 2009 (dec 31 2008) you get a period of neae neutral rates. During this period the sharpe ratio is much higher for vglt than edv .26 vs .18.

Any period in which rates don't fall, the sharpe for vglt will be much higher. Over long time periods like 30 or 50 years this matters less (even if rates fall they are falling less per year).
Which share class? VGLSX does not seem to go back any further than VGLT. Comparing VEDTX (EDV) and TLT as another comparison gives a similar Sharpe ratio of about 0.31 for TLT and 0.3 for VEDTX from Dec 2007 to present (almost 15 years.)

Perhaps you are referring to VUSTX? VUSTX is actively managed and different holdings so not the same as VGLT. Even then the Sharpe is .34 for VUSTX vs .3 for VEDTX from Dec 2007 to present.
Again, from Dec 2007 to present long term interest rates fell 1%. Starting Dec 31 2008 produces a period of flat rates, which produces a fair comparison.

As comeinvest pointed out the carry on the 30 y is abysmal and has been very poor historically as well.

If you go back longer the sharpe on the longest maturities is terrible. Or pick a period of near flat rates. Picking relatively short periods with large interest rate decreases is going to make the longest maturities look artificially good due to the large capital gains they experience in such periods.
Last edited by skierincolorado on Tue Sep 13, 2022 9:00 am, edited 4 times in total.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

am wrote: Tue Sep 13, 2022 8:42 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
They do not. It was a risk explicitly stated in original post. Fed support for market was assumed. Risk has shown up. Tmf to zero may happen
People keep saying this. How does it go to zero?? Pardon my ignorance. Wouldn't long term treasuries have to fall 33% in a day?
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

skierincolorado wrote: Tue Sep 13, 2022 8:55 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Only if both of the non correlated components have a good expected return. I'm unsure if TMF does. If rates never changed from here on out, what would TMF return?

Its return from 2010 thru 2019 - a period where for the start and end dates, both rates and rate expectations had to be near 0 - was 16% annualized, so maybe it is great..
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Even 2010 thru 2013, when rates were zero and flat as a pancake, and expectations for rate increases would be either flat or increasing.. TMF returned 10% annualized.. the more I look at TMF the more I like it..
kbourgu
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by kbourgu »

Can someone post some hopium? Are rates set to rise for years to come?
Tamalak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Tamalak »

Wait no, I should be looking at 10 year yields, not rates.

January of 2011 and now, both yielding ~3.3%

CAGR from 2011 to now, a lousy 3%.

This would argue that TMF by itself does not have a good return so it isn't useful as a zero-correlation component of a portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by skierincolorado »

Tamalak wrote: Tue Sep 13, 2022 9:08 am
skierincolorado wrote: Tue Sep 13, 2022 8:55 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Only if both of the non correlated components have a good expected return. I'm unsure if TMF does. If rates never changed from here on out, what would TMF return?

Its return from 2010 thru 2019 - a period where for the start and end dates, both rates and rate expectations had to be near 0 - was 16% annualized, so maybe it is great..
Long term rates fell a lot from 2010 to present. Expected returns for tmf are not high, but are probably positive. One estimate is the term premium.
Tamalak
Posts: 1989
Joined: Fri May 06, 2016 2:29 pm

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

Post by Tamalak »

skierincolorado wrote: Tue Sep 13, 2022 9:25 am
Tamalak wrote: Tue Sep 13, 2022 9:08 am
skierincolorado wrote: Tue Sep 13, 2022 8:55 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Only if both of the non correlated components have a good expected return. I'm unsure if TMF does. If rates never changed from here on out, what would TMF return?

Its return from 2010 thru 2019 - a period where for the start and end dates, both rates and rate expectations had to be near 0 - was 16% annualized, so maybe it is great..
Long term rates fell a lot from 2010 to present. Expected returns for tmf are not high, but are probably positive. One estimate is the term premium.
I was foolishly looking at 10 year rates when TMF is leveraged 20 year.

Let's look at 20 year rates and try to compare apples to apples:

https://www.multpl.com/20-year-treasury ... le/by-year

Jan 1 2012, rate 2.69%. Jan 1 2018, rate 2.73%. Close enough even for leverage, right?

But the CAGR of TMF from 2012 thru 2017 is only 3.8%.

Jan 1 2015, rate 2.20%. Jan 1 2022, rate 2.15%.

CAGR of TMF from from 2015 thru 2021 is only 5%.

In the long run, it doesn't look like TMF has a good return at all! So what makes it useful? Its correlation to zero, so it provides no protection to UPRO. And its return on its own is pitiful compared to its huge volatility.
Last edited by Tamalak on Tue Sep 13, 2022 9:37 am, edited 1 time in total.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

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

Post by Marseille07 »

Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
Buddy, it's already known that the long-term correlation of stocks & bonds is 0.

But here is the thing, people still flock to buy bonds if there is a big crash like March 2020. That said, the negative correlation is certainly diluted during a rising yield regime.

Basically the whole notion of a BH portfolio is called into question during a rising yield regime.
Tamalak
Posts: 1989
Joined: Fri May 06, 2016 2:29 pm

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

Post by Tamalak »

Marseille07 wrote: Tue Sep 13, 2022 9:37 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
Buddy, it's already known that the long-term correlation of stocks & bonds is 0.

But here is the thing, people still flock to buy bonds if there is a big crash like March 2020. That said, the negative correlation is certainly diluted during a rising yield regime.

Basically the whole notion of a BH portfolio is called into question during a rising yield regime.
So what you're saying is.. although the long term correlation is zero, it tends to be more negatively correlated when rescue is needed the most - like March 2020 or 2008 disasters - and more positively correlated during other times?
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

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

Post by Marseille07 »

Tamalak wrote: Tue Sep 13, 2022 9:39 am So what you're saying is.. although the long term correlation is zero, it tends to be more negatively correlated when rescue is needed the most - like March 2020 or 2008 disasters - and more positively correlated during other times?
Correct. So don't draw a conclusion that corr=0 means uncorrelated, because that would not be accurate.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

Tamalak wrote: Tue Sep 13, 2022 9:35 am
skierincolorado wrote: Tue Sep 13, 2022 9:25 am
Tamalak wrote: Tue Sep 13, 2022 9:08 am
skierincolorado wrote: Tue Sep 13, 2022 8:55 am
Tamalak wrote: Tue Sep 13, 2022 8:20 am When I go to portfolio visualizer and plug in "long term treasury" for the range 2010-2019 - the range available for UPRO and TMF data at the time this adventure was started - the correlation between treasuries and the US stock market was a glorious -0.48

When I plug in "long term treasury" for the FULL range available - 1972-2022 - the correlation between treasuries and the US stock market was 0.04 ... essentially 0.

If Treasuries don't move against US stocks, but instead wiggle around with no regard to US stocks, how can they act as protection?
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Only if both of the non correlated components have a good expected return. I'm unsure if TMF does. If rates never changed from here on out, what would TMF return?

Its return from 2010 thru 2019 - a period where for the start and end dates, both rates and rate expectations had to be near 0 - was 16% annualized, so maybe it is great..
Long term rates fell a lot from 2010 to present. Expected returns for tmf are not high, but are probably positive. One estimate is the term premium.
I was foolishly looking at 10 year rates when TMF is leveraged 20 year.

Let's look at 20 year rates and try to compare apples to apples:

https://www.multpl.com/20-year-treasury ... le/by-year

Jan 1 2012, rate 2.69%. Jan 1 2018, rate 2.73%. Close enough even for leverage, right?

But the CAGR of TMF from 2012 thru 2017 is only 3.8%.

Jan 1 2015, rate 2.20%. Jan 1 2022, rate 2.15%.

CAGR of TMF from from 2015 thru 2021 is only 5%.

In the long run, it doesn't look like TMF has a good return at all! So what makes it useful? Its correlation to zero, so it provides no protection to UPRO. And its return on its own is pitiful compared to its huge volatility.
I pretty much agree. 3-5% is still positive and so the expected return of hfea (165% stock 135% LtT) is probably higher than 165% stock alone. And in the future I expext tmf to return more like 3-3.5% based on the term premium near zero. Not worth the extra risk in my opinion. A modest position in ITT captures most of the potential return with less risk and similar potential for downside protection during the worst market crashes like 01 08 and 20.
perfectuncertainty
Posts: 386
Joined: Sun Feb 04, 2018 6:44 pm

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

Post by perfectuncertainty »

comeinvest wrote: Mon Sep 12, 2022 4:22 pm Can you please explain the meaning or importance of the "value of convexity" intuitively in layman terms please? Is it significant?
Convexity was postulated to manage the risk of rate rising by Hedgie early on and links were posted to the articles on Convexity. So far it hasn't materialized.
perfectuncertainty
Posts: 386
Joined: Sun Feb 04, 2018 6:44 pm

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

Post by perfectuncertainty »

Marseille07 wrote: Tue Sep 13, 2022 9:37 am Buddy, it's already known that the long-term correlation of stocks & bonds is 0.

But here is the thing, people still flock to buy bonds if there is a big crash like March 2020. That said, the negative correlation is certainly diluted during a rising yield regime.

Basically the whole notion of a BH portfolio is called into question during a rising yield regime.
That's not quite accurate. The correlation changes between 0, + and - depending on the macro environment. It has registered as all correlations for decades. Don't count on the correlation - is my point.

Link: https://www.mfs.com/en-us/investment-pr ... ation.html

"In recent decades, negative correlations between stocks and bonds have been a tailwind for asset allocators, but negative correlations have been the historical exception, not the rule."
corpgator
Posts: 217
Joined: Wed Jul 22, 2015 12:00 pm

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

Post by corpgator »

skierincolorado wrote: Tue Sep 13, 2022 9:47 am
Tamalak wrote: Tue Sep 13, 2022 9:35 am
skierincolorado wrote: Tue Sep 13, 2022 9:25 am
Tamalak wrote: Tue Sep 13, 2022 9:08 am
skierincolorado wrote: Tue Sep 13, 2022 8:55 am
If someone invested in this strategy because they expected bonds would always or usually move against stocks, that was contrary to this long term history.

That said, correlations below 1.0 are beneficial in modern portfolio theory. A correlation near 0 is still quite good and beneficial to portfolio construction.
Only if both of the non correlated components have a good expected return. I'm unsure if TMF does. If rates never changed from here on out, what would TMF return?

Its return from 2010 thru 2019 - a period where for the start and end dates, both rates and rate expectations had to be near 0 - was 16% annualized, so maybe it is great..
Long term rates fell a lot from 2010 to present. Expected returns for tmf are not high, but are probably positive. One estimate is the term premium.
I was foolishly looking at 10 year rates when TMF is leveraged 20 year.

Let's look at 20 year rates and try to compare apples to apples:

https://www.multpl.com/20-year-treasury ... le/by-year

Jan 1 2012, rate 2.69%. Jan 1 2018, rate 2.73%. Close enough even for leverage, right?

But the CAGR of TMF from 2012 thru 2017 is only 3.8%.

Jan 1 2015, rate 2.20%. Jan 1 2022, rate 2.15%.

CAGR of TMF from from 2015 thru 2021 is only 5%.

In the long run, it doesn't look like TMF has a good return at all! So what makes it useful? Its correlation to zero, so it provides no protection to UPRO. And its return on its own is pitiful compared to its huge volatility.
I pretty much agree. 3-5% is still positive and so the expected return of hfea (165% stock 135% LtT) is probably higher than 165% stock alone. And in the future I expext tmf to return more like 3-3.5% based on the term premium near zero. Not worth the extra risk in my opinion. A modest position in ITT captures most of the potential return with less risk and similar potential for downside protection during the worst market crashes like 01 08 and 20.
I'm glad for your contributions. Because of them, I stopped rebalancing into TMF and started buying TYD. It's not much, but it has helped some. I've looked at the portfolio overall instead of bucketing. I have a large position in HFEA (and shrinking!), so it has been hard to stomach. Maybe it will recover some day...
CletusCaddy
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by CletusCaddy »

Not sure what all the TMF gripping is all about. TMF is saving UPRO’s butt today.
perfectuncertainty
Posts: 386
Joined: Sun Feb 04, 2018 6:44 pm

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

Post by perfectuncertainty »

"The correlation between stocks and bonds is one of the most important inputs to the asset allocation decision. However, it is difficult to estimate reliably and can change drastically with macroeconomic conditions. From 1927 to 2012, the correlation between the S&P 500 and long-term Treasuries – as calculated by calendar year based on monthly data – has changed sign 29 times, and has ranged from −93% to +86%."

Pimco on the Stock Bond Correlation
Tamalak
Posts: 1989
Joined: Fri May 06, 2016 2:29 pm

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

Post by Tamalak »

perfectuncertainty wrote: Tue Sep 13, 2022 10:40 am
Marseille07 wrote: Tue Sep 13, 2022 9:37 am Buddy, it's already known that the long-term correlation of stocks & bonds is 0.

But here is the thing, people still flock to buy bonds if there is a big crash like March 2020. That said, the negative correlation is certainly diluted during a rising yield regime.

Basically the whole notion of a BH portfolio is called into question during a rising yield regime.
That's not quite accurate. The correlation changes between 0, + and - depending on the macro environment. It has registered as all correlations for decades. Don't count on the correlation - is my point.

Link: https://www.mfs.com/en-us/investment-pr ... ation.html

"In recent decades, negative correlations between stocks and bonds have been a tailwind for asset allocators, but negative correlations have been the historical exception, not the rule."
As I've come to understand it the HFEA perspective is this.

The "real" risk of 3x S&P is not gloomy, grinding years like this one. -50% YTD may seem like a lot, but it's only set UPRO back 18 months.. same as 1x S&P. During these "ordinary" drops, TMF will wiggle around as it pleases, hurting as often as it helps, and offering a pitiful return for its volatility on its own (my numbers say something like 2x 20 year rates)

The "real" risk of 3x S&P are lightning strike disasters like 2008 or 2020. The speed of the crash makes 3x leverage much worse and destroys underlying capital. What cuts to the bone in 1x cuts through the bone in 3x. In these scenarios UPRO gets set back, calendar-wise, much further than 1x S&P. And these are the scenarios where the Fed, and therefore TMF, will come to the rescue.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

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

Post by Marseille07 »

perfectuncertainty wrote: Tue Sep 13, 2022 10:40 am That's not quite accurate. The correlation changes between 0, + and - depending on the macro environment. It has registered as all correlations for decades. Don't count on the correlation - is my point.

Link: https://www.mfs.com/en-us/investment-pr ... ation.html

"In recent decades, negative correlations between stocks and bonds have been a tailwind for asset allocators, but negative correlations have been the historical exception, not the rule."
Tbh I don't care much about the correlation because this whole bond game is about the yields, and I'm not even playing the bond game.
corpgator
Posts: 217
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by corpgator »

CletusCaddy wrote: Tue Sep 13, 2022 10:45 am Not sure what all the TMF gripping is all about. TMF is saving UPRO’s butt today.
TMF is down more than 2% on the day. There's nothing saving going on since cash would be better. Saving would be tmf up on a big red day like today.
Marseille07
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Marseille07 »

Tamalak wrote: Tue Sep 13, 2022 9:35 am I was foolishly looking at 10 year rates when TMF is leveraged 20 year.
While it is better to look at 20Y, looking at 10Y as a proxy is not foolish by any means.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

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

Post by Marseille07 »

corpgator wrote: Tue Sep 13, 2022 11:30 am
CletusCaddy wrote: Tue Sep 13, 2022 10:45 am Not sure what all the TMF gripping is all about. TMF is saving UPRO’s butt today.
TMF is down more than 2% on the day. There's nothing saving going on since cash would be better. Saving would be tmf up on a big red day like today.
Because the 20Y is still quite low. The bond market front-ran the CPI report and failed. I was laughing when the Ten hit 2.6% in July.
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