HEDGEFUNDIE's excellent adventure

[PHANTASOS]

Ok, who else here has spent at least a couple hours of their life reading this thread on Bogleheads?

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007&newpost=4688101

Read the first post. If it doesn’t seem interesting, you definitely should not read all 3256 posts in the thread.

[Zaphod]

Holy cow, you can simulate funds on portfolio viz? I didnt make it past that info. Thats awesome.

 

On further reading he doesnt seem to understand path dependency and volatility decay quite enough as evidenced by that seeking alpha level explanation of decay. Path dependency, drift and underlyings all really matter.

Its fine to hold 3x leveraged funds on things that trend and have a low standard volatility. Its burning money to do so with something that either doesnt trend, has a high volatility or holding costs/futures curve in contango/backwardation (say commodities like gold for example).

[PHANTASOS]

Rather than titling this thread the way I did, I should have used "Who here is reading the longest, most sensational thread on Bogleheads in recent memory?"  It is like reading Market-timer's epic thread in real time.

 

The gist of this is:

1. Equity-like returns, improved with strategy involving leverage and risk-parity.

2. Low correlation with S&P500

3. Original poster started the strategy with $100k, which he is not dependent on for retirement, but considers his "lottery ticket."  He is up to $143,702 (43.7% YTD).

 

For anyone here who is not familiar with portfolio visualizer, this is a good opportunity to play around with it while looking at the backtest results for this strategy.

Zaphod: they do discuss volatility decay quite a bit, you must have missed a few while reading the 70 pages / >3000 posts.

 

[fatlittlepig]

I’ll be completely honest, Fatlittlepig is very intrigued and has been following this thread and considering participating.

[Zaphod]

Phantasos wrote:

Rather than titling this thread the way I did, I should have used “Who here is reading the longest, most sensational thread on Bogleheads in recent memory?”  It is like reading Market-timer’s epic thread in real time.

 

The gist of this is:

1. Equity-like returns, improved with strategy involving leverage and risk-parity.

2. Low correlation with S&P500

3. Original poster started the strategy with $100k, which he is not dependent on for retirement, but considers his “lottery ticket.”  He is up to $143,702 (43.7% YTD).

 

For anyone here who is not familiar with portfolio visualizer, this is a good opportunity to play around with it while looking at the backtest results for this strategy.

Zaphod: they do discuss volatility decay quite a bit, you must have missed a few while reading the 70 pages / >3000 posts.

 

Click to expand...

I saw a bit of the discussion but it was a superficial understanding and incomplete. Always easy to get yourself in trouble that way. I didnt seen any mention of path dependency or trend, etc...as being major factors, but alas I definitely have not read the whole thing or close to it. Kudos to them for being able to hold with that level of volatility.

Volatility is a killer for these strategies, as some posters mentioned, a safety valve vol screen could sometimes be useful. Charlie Bilello had an interesting study on a version of this in 2016, https://pensionpartners.com/leverage-for-the-long-run/. Good read.

If you want to really see how leverage works and especially daily rebalancing which is a different form, this is an excellent primer that even breaks down leverage factors by market and what has, when, and never worked. http://ddnum.com/articles/leveragedETFs.php

[ajm184]

It is intriguing idea and well defended in terms of choices while acknowledging and not minimizing potential weaknesses.  As the OP states, this is a 'lottery ticket' using a small portion of investable NW so from an overall risk management standpoint he is not putting himself at substantial risk.

I also find it ironic this idea is on Bogleheads, given the low cost/indexing mantra predominant on this site, when this is almost the opposite (leverage plus high cost fund ER's).

This idea has a couple critical components IMO:

a.  Execution within a ROTH IRA only.  The leverage/re-balancing component makes it prohibitively expense from a tax standpoint to undertake otherwise IMO.

b.  Human Behavior aspect.  This idea takes alot of discipline to execute per plan rebalancing while avoiding the almost mccabe fascination of looking at price volatility on a daily/hourly basis.

[WCInovice]

I was thinking of doing this with about 10% of my net worth, but I was so far behind in retirement savings and don't have enough (back door) roth funds to do this.

 

So maybe not worth it if only in taxable account?

[auggie1983]

There will some that add in ZIV to address the volatility component to these strategies.

[fatlittlepig]

ajm184 wrote:

It is intriguing idea and well defended in terms of choices while acknowledging and not minimizing potential weaknesses.  As the OP states, this is a ‘lottery ticket’ using a small portion of investable NW so from an overall risk management standpoint he is not putting himself at substantial risk.

I also find it ironic this idea is on Bogleheads, given the low cost/indexing mantra predominant on this site, when this is almost the opposite (leverage plus high cost fund ER’s).

This idea has a couple critical components IMO:

a.  Execution within a ROTH IRA only.  The leverage/re-balancing component makes it prohibitively expense from a tax standpoint to undertake otherwise IMO.

b.  Human Behavior aspect.  This idea takes alot of discipline to execute per plan rebalancing while avoiding the almost mccabe fascination of looking at price volatility on a daily/hourly basis.

Click to expand...

I don't think it's accurate to characterize it as a lottery ticket. A lottery ticket to me would be buying an out of the money call option with little chance of becoming in the money. This seems to me more like an aggressive way to participate in the market...

[Zaphod]

auggie1983 wrote:

There will some that add in ZIV to address the volatility component to these strategies.

Click to expand...

I dont see how that addresses the volatility, ZIV is harvesting the mid term futures volatility risk premium. Its less prone to backwardation than the front months (1/2) as its the 4/7 spread, but its still short vol. In a rising volatility market ziv will still lose and be positively correlated. Havent run a simulation but I'd be shocked if that werent true.

The point of the boglehead guys strategy is heavy bonds as the risk off negatively correlated asset, which is doing well.

[Zaphod]

fatlittlepig wrote:

I don’t think it’s accurate to characterize it as a lottery ticket. A lottery ticket to me would be buying an out of the money call option with little chance of becoming in the money. This seems to me more like an aggressive way to participate in the market…

Click to expand...

Agree, this is simply harvesting known factors that work (leverage) in a market that trends up over time with relatively low volatility.

If volatility increases, the higher factor (3 in this case) is a negative, it only works in certain market conditions. Backing it off or completely so in these conditions is warranted.

I have wanted to do a strategy and have dabbled in it of on big sell offs/dips etc..to "volatility harvest" my account. That is say you hold VTI, and you have a brutal sell off like last q4, at some point you sell VTI for UPRO or something, ride it back up, sell it and get back into VTI at some predetermined stop loss/trail/vol level. Rinse repeat. In reality its incredibly hard to hold those positions. I actually did this in January, but dropped them far too soon.

[Zzyzx]

gonna wait a bit before trying this

HEDGEFUNDIE wrote: ↑

Wed Aug 14, 2019 10:55 am

55/45 down 1.2% today. Hardly “crushed”.

If I knew we were going into a recession I wouldn’t have any UPRO.

 

 

[fatlittlepig]

ajm184 wrote:

It is intriguing idea and well defended in terms of choices while acknowledging and not minimizing potential weaknesses.  As the OP states, this is a ‘lottery ticket’ using a small portion of investable NW so from an overall risk management standpoint he is not putting himself at substantial risk.

I also find it ironic this idea is on Bogleheads, given the low cost/indexing mantra predominant on this site, when this is almost the opposite (leverage plus high cost fund ER’s).

This idea has a couple critical components IMO:

a.  Execution within a ROTH IRA only.  The leverage/re-balancing component makes it prohibitively expense from a tax standpoint to undertake otherwise IMO.

b.  Human Behavior aspect.  This idea takes alot of discipline to execute per plan rebalancing while avoiding the almost mccabe fascination of looking at price volatility on a daily/hourly basis.

Click to expand...

i wonder if instead of selling UPRO or TMF to "rebalance" you buy some of each to keep the 40/60 ratio, would that get rid of the tax issues...

 

[legobikes]

I'll wait for someone to provide a step by step guide. I'd be willing to do this with a small portion of my money, say, this year's backdoor Roth, and quarantine it from the rest of my savings. Kind of like that $100 I bought in bitcoin way back when.

[Zzyzx]

fatlittlepig wrote:

i wonder if instead of selling UPRO or TMF to “rebalance” you buy some of each to keep the 40/60 ratio, would that get rid of the tax issues…

 

Click to expand...

HEDGEFUNDIE wrote: ↑

Tue Feb 05, 2019 2:56 pm

What is your goal?
$10M. If past is prologue, I should be able to hit this number in 20 years when I am 53 years old, at which point I will stop "playing the game" and move into [unleveraged] Treasuries. Penalty-free Roth IRA withdrawals begin, as we all know, at 59.5.