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HEDGEFUNDIE's excellent adventure

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  • The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

     It is like reading Market-timer’s epic thread in real time.

     

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    Which I followed. And all sounded very intelligent. Until it didn’t.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239159 Reply
    Liked by angeladiaz99
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    I dont think we’re necessarily in a recession or even at near term risk (60d), but things are definitely later on in the game (we hiked, and now have cut), money has tightened, world looks to be slowing (much like 2015-2016) and you have a ton of self inflicted and unknown minute to minute ginormous changes that can be put into play on a whim. If everyone gets scared about the future and doesnt invest or buy stuff, that could tip it over itself, like a self fulfilling prophecy, interesting times.

    This is not exactly what I would call an ideal macro environment for leveraged bets. 2017 otoh, amazing.

    #239162 Reply
    Liked by jz
    Avatar ajm184 
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    Joined: 07/14/2017
    I don’t think it’s accurate to characterize it as a lottery ticket.

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    OP of the Boglehead called it a ‘lottery ticket’.  His reason stated is taking a small portion of his investible NW with the potential (expectation?) of a return high enough that accelerates FI (thought the number was $8 to $10 Million) versus an index equity asset over a long timeframe.

    Agree that ‘lottery ticket’ is not the correct verbage, though it seems to be used in the context of a goal versus the idea/execution/process.  The unknowns of a participant in a market are exponentially greater than a lottery.

    #239183 Reply
    Avatar auggie1983 
    Participant
    Status: Physician
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    Joined: 12/31/2018

    Agree on ZIV.

    We need to personally assess what our level of risk is for a given possible return.  The 3 fund, 4 fund etc portfolios are nothing more than saying I will accept X expected return for Y given of risk (volatility, max draw down, whatever you are using).  My take is if you truly know your risk profile, using leverage to get you there should get you better returns with similar risk profile than the 3 or 4 fund portfolios often put forth here as the best thing since sliced bread.  If you just want 100% S&P returns, putting 33% of your money in UPRO, 67% in muni bond or high yield account or income producing fund and using those returns to buy puts against the S&P will do better than just putting 100% of money in SPY.

    I don’t think leverage is necessarily bad in a volatile market.  Taken to the extreme, as the leverage factor approaches infinity, the amount of portfolio that needs to be used to get the desired return approaches zero.  So if some day there is a 100X SPY ETF, and my goal is to make the return of the S&P with less risk, I could put 1% of my portfolio in this 100X fund.  Market goes up 5% in a day, my portfolio goes up 5% (fees, drag, etc need to be accounted for).  But… market goes down 5%, my portfolio goes down 1%.

    #239185 Reply
    Liked by Zaphod
    fatlittlepig fatlittlepig 
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    Joined: 01/26/2017

    I’m in for a very small amount with intention to add to position over time.

    #239192 Reply
    Avatar auggie1983 
    Participant
    Status: Physician
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    Would use TQQQ instead of UPRO

    #239194 Reply
    Zzyzx Zzyzx 
    Participant
    Status: Physician
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    Joined: 09/24/2018

    Recall pre-2008 leveraged funds were all the rage and then boom went the dynamite and their net asset values tanked and most never really bounced back. Leveraged investments behave differently than unleveraged investments. I’ll leverage up when markets stabilize but not in the midst of an inverted yield curve situation

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

    #239195 Reply
    triad triad 
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    Status: Dentist, Small Business Owner
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    interesting thread.  the reason he uses leverage is because he wants it to be more aggressive.  why not go 80% VTI and 20% TMF so only the treasuries are leveraged?

    #239200 Reply
    Liked by Zaphod
    Zaphod Zaphod 
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    Agree on ZIV.

    We need to personally assess what our level of risk is for a given possible return.  The 3 fund, 4 fund etc portfolios are nothing more than saying I will accept X expected return for Y given of risk (volatility, max draw down, whatever you are using).  My take is if you truly know your risk profile, using leverage to get you there should get you better returns with similar risk profile than the 3 or 4 fund portfolios often put forth here as the best thing since sliced bread.  If you just want 100% S&P returns, putting 33% of your money in UPRO, 67% in muni bond or high yield account or income producing fund and using those returns to buy puts against the S&P will do better than just putting 100% of money in SPY.

    I don’t think leverage is necessarily bad in a volatile market.  Taken to the extreme, as the leverage factor approaches infinity, the amount of portfolio that needs to be used to get the desired return approaches zero.  So if some day there is a 100X SPY ETF, and my goal is to make the return of the S&P with less risk, I could put 1% of my portfolio in this 100X fund.  Market goes up 5% in a day, my portfolio goes up 5% (fees, drag, etc need to be accounted for).  But… market goes down 5%, my portfolio goes down 1%.

    Click to expand…

    That is a slight mis statement of reality but I get what you’re saying. I often use the leveraged funds to get the amount of exposure I want with less overall cash at risk, basically as you said 33% in UPRO/TQQQ and the rest cash/bonds, etc…

    Leverage is only bad in a volatile market if the volatility is in the opposite direction you desire. This is what a sortino ratio describes, if volatile is it the good kind?

    The problem is path dependency of course. Even if the overall outcome is up 10% for the underlying over a years time, the path it takes to get there can either wipe you out or make you rich. This is easy to see with a little math. The issue with the 100x of anything is it just takes nothing to smoke the account to zero, and the differential needs for rebuilding (ie a 50% drop requires a 100% recovery to get to zero) starts to really make things nigh impossible. 4x leverage has never worked in any market for this reason. Of course if there were no down days you could leverage to the max with zero concerns, but that isnt what we deal with. You always have to have risk controls.

    Also you have to remember that daily rebalanced is not the same as traditional leverage, that has both good and bad aspects, but a choppy trendless market will absolutely crush you.

    If people are interested even for the knowledge side of things, I’d read the links, they describe things pretty well.

    #239203 Reply
    Zaphod Zaphod 
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    There are actually a couple of interesting funds out there like the 90/60 equity/bond funds as well. Really some neat stuff, but some arent capitalized well yet.

    #239205 Reply
    Avatar auggie1983 
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    Status: Physician
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    Joined: 12/31/2018

    That’s where I meant ZIV could come into play… in those choppy trend-less markets.

    #239206 Reply
    Zaphod Zaphod 
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    That’s where I meant ZIV could come into play… in those choppy trend-less markets.

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    Ah, well, yes. It all depends on the shape of the curve. Its backwardated even for ZIV months at this time. I used to trade SVXY a lot, now its neutered and not as fun, and some times getting long/short volatility is actually simpler and accomplishes the same way using one of these triple leveraged funds.

    #239217 Reply
    fatlittlepig fatlittlepig 
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    Hi zaphod could you explain in simple english the downsides as you see them to the UPRO/TMF investment?

    #239239 Reply
    Liked by Lordosis
    Avatar Phantasos 
    Participant
    Status: Physician
    Posts: 86
    Joined: 01/06/2016
    There are actually a couple of interesting funds out there like the 90/60 equity/bond funds as well. Really some neat stuff, but some arent capitalized well yet.

    Click to expand…

    The original 40% UPRO / 60 % TMF has some similarities to PSLDX.

     

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

    #239260 Reply
    Liked by Zaphod
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    First and foremost theres no reason that bonds and equities have to stay so negatively correlated. That is when stocks go up bonds go down (price) or vice versa. Easily imagined situation is say some sneaky inflation pops up, fed has to increase rates, etc…stocks dive and yields jump, both would be down.

    Its important to understand what you’re really doing with these funds, and its easy to say “duh, you’re leveraged” which is true but you’re really banking on a generally positive return path (path dependency) and fairly low volatility all things considered in major indexes. This is why things like 3x S/P and QQQ generally crush it and return far more than their 3x would make you guess (closer to 10x in reality). Otoh, funds like gold/oil etc…can have years where both the +/-3x fund get crushed since the underlying index doesnt trend and is very volatile compared to the major indexes.

    If you go long these instruments you are essentially shorting volatility, making an explicit bet that the gains/path in the market are going to be higher than the volatility drag of the instrument. I’ve long argued the point there is no magic in 3x fund vs a regular fund like VTI, as it is also leveraged to a factor of 1 and all suffer volatility drag. At what point does it become bad? Well that depends on the volatility mainly. Lower volatility equals higher leverage, this is the very basic premise behind risk parity, not at all rocket science that strategy. Its important to remember you are short volatility, in higher volatility environments you will be destroyed. These would probably be great with a vol filter, but its tough, more timing leads to more whipsaws and mistakes. Maybe some kind of macro filter and tactical allocation would make more sense. That one paper uses the 200d which is as good an arbitrary point as any.

    Simply trying to hold these during rough periods is very hard. I’ve done it, but I’ve mostly failed at it. I did buy some TQQQ in my wifes account monday after brexit and havent touched it, that was sweet (all 10 shares at the time).

    During q4 last yea:

    SPY/QQQ lost 14.33/17.14%

    Triple counterparts:

    UPRO/TQQQ -39.97/-48.23%

    So if you were in the strategy using TQQQ, you lost nearly 50%! Hard to be objective, make great decisions, etc…sizing definitely comes in to play here. You have to find a size big enough to make a difference yet not so big it may keep you up or cause you to act foolishly. For people that can put things on autopilot, never look, etc….this can be a great situation. Honestly I have long planned to go pretty big into these instruments after a recession has been called, etc…

    You also have counterparty risk of course as everyone who traded or even knows about XIV understands, they could back out or screw it up, etc…I think this is a bit more unlikely but I wouldnt be shocked at all during some kind of flash type crash scenario to see these be severely dislocated (but possible for other funds ofc).

    I think right now is a pretty sketchy time to get involved with these as no one and no instrument seems to have a stable take on whats happening in the world. However, it may just be another great buying opportunity. The definite best way to get a handle on these things is to simply trade them. Size appropriately, get a feel for it and if you can handle it. I have been so so at handling it, too involved. Have been working on being more apathetic and letting things run, only focusing on the big stuff.

    What will you do in a recession if this is down 90+% from where you bought it? Abandon it, think it was dumb to consider? Etc….thats the big issue this late in the game, even if we havent peaked yet, we’re far closer to that time.

    Oddly enough over time the optimized leverage for the SP has been about 3, for the Nasdaq its been around 2, due to its higher volatility.

    Sorry I dont think I did a good job making it short or simple. Basically, they are incredibly hard to hold which can lead to poor decisions (impossible to understand the state you’ll be in during a massive draw down until your there) and now isnt really the best time to be jumping in maybe but obviously thats a market call which are prone to being dead wrong. Maybe wade in a bit. I certainly think leveraged funds should be used by more people more strategically, as auggie mentioned to get a bit more exposure with less.

    #239268 Reply

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