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HEDGEFUNDIE's excellent adventure

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  • Avatar Phantasos 
    Participant
    Status: Physician
    Posts: 81
    Joined: 01/06/2016

    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.

    "The problem with internet quotes is that you can't always depend on their accuracy" - Abraham Lincoln, 1864

    #237674 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    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).

    #237682 Reply
    Avatar Phantasos 
    Participant
    Status: Physician
    Posts: 81
    Joined: 01/06/2016

    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.

     

    "The problem with internet quotes is that you can't always depend on their accuracy" - Abraham Lincoln, 1864

    #239043 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 1153
    Joined: 01/26/2017
    medical school scholarship sponsor

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

    #239045 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    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

    #239079 Reply
    Avatar ajm184 
    Participant
    Status: Other Professional
    Posts: 612
    Joined: 07/14/2017

    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.

    #239102 Reply
    Liked by Zaphod
    Avatar WCInovice 
    Participant
    Status: Physician
    Posts: 39
    Joined: 12/17/2017

    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?

    #239122 Reply
    Avatar auggie1983 
    Participant
    Status: Physician
    Posts: 23
    Joined: 12/31/2018

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

    #239127 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 1153
    Joined: 01/26/2017

    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…

    #239129 Reply
    Liked by Zaphod
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    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.

    #239132 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    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.

    #239134 Reply
    Zzyzx Zzyzx 
    Participant
    Status: Physician
    Posts: 175
    Joined: 09/24/2018

    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.

     

     

    It’s psychosomatic. You need a lobotomy. I’ll get a saw.

    #239145 Reply
    Liked by Zaphod
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 1153
    Joined: 01/26/2017

    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…

     

    #239152 Reply
    legobikes legobikes 
    Participant
    Status: Physician
    Posts: 249
    Joined: 05/25/2017

    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.

    #239153 Reply
    Zzyzx Zzyzx 
    Participant
    Status: Physician
    Posts: 175
    Joined: 09/24/2018

    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.

    It’s psychosomatic. You need a lobotomy. I’ll get a saw.

    #239158 Reply

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