Thoughts about Hedgefundie's adventure?

Investing / Portfolios
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Dear Forum,

I love the simplicity of having an all VT portfolio. However, I am always very interested in alternative investing approaches.

Hedgefundie’s adventure really fits the bill here (HEDGEFUNDIE's excellent adventure Part II: The next journey - Bogleheads.org). The leveraged portfolio consists of 55% UPRO (3x S&P 500) and 45% TMF (3x 20 Year Treasury bills).

What I find particuarly interesting about this portfolio apart from its returns is the fact that it has a very low market correlation in comparison to VT and also very good sharpe ratios.

Does anyone in this forum have some experience with this? Any thoughts? For me I am considering allocating 5-10% to it and then rebalance quarterly.

One important consideration is access to US-ETFs so I am waiting on the access situation to clear up a bit.

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Please search for other threads where the Hedgefundie approach was discussed already.

Leveraged ETFs are working fine as long as the markets are going up. They will kill you when you hit a smaller (or bigger) bear market. Plus, good luck explaining the leveraged ETF to the tax authorities.

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First, 10k with 3x leverage is not equal to 30k invested. If you want some math, you may want to take a look at the concept of geometric return. This can be the first stop (I have some more to add, but no time for now unfortunately).

Second, this funds and mathematics behind the portfolio is tuned for US-based investors. During a crash there is a big chance that both stocks and USDCHF goes down, so your portfolio won’t hold the value. Safe part of your portfolio should be interest bearing bonds / money markets instruments, which is currently CHF cash (0.75+% above the risk free rate!).

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I have been following HF adventures for a while on bogleheads.

I agree with previous comments, if the market stagnates then 3x ETFs don’t do well, if market decline it may take a long time to get back to initial levels.

Moreover, you need to have a big chunk of your portfolio to make a difference. It you only invest 10k here and there it won’t matter.

However, I am willing to give it a try. I told myself that during the next bear market or big correction I may invest in HF. In this case, I will try to minimize the potential downside.

Easy to say, less to do it. Let’s see if I have the balls to invest in this way. I will keep people posted :slight_smile:

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Hey all,

First of all thanks for your answers.

Personally, I think I am in the camp of Steve where I think it might be worth to give it a try. I was especially interested in this due to the various back testing across different market conditions going back multiple decades.

As always there are no magic bullets and this strategy has tradeoffs.

To give you a better understanding of where I am coming from let me describe my situation.

I think I am a rather young member of the Forum (24) giving me a long investment horizon. I am 100% VT and really believe in this approach.

Nonetheless, I was curious about some interesting approaches that might be suitable for younger investors like me.

Let me rephrase the question I posed in the beginning: What were (more elaborate) investment approaches that you found interesting and ideally would be applicable to my situation?

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I have seen in this forum few strategies or commentary beyond HF:

  1. use of margin. Some have used margin during Covid downturn to amplify bounce back
  2. qualify factor ETFs. Some uses here as provide better / similar return but lower downside
  3. small cap Tilt. It’s proved small cap delivers over long period better return thank total market. I like active though rather than passive funds as in passive you have lot of performance dilution. Challenge: pick the next winner
  4. 130-30. 130 long and 30 short. It amplifies the results. Few banks offer this now

Other things that are not sophisticated but options to amplify return but also risks are:

  1. Stock picking
  2. Pre-IPO stocks (there are some sites like equity zen that let you buy stocks or funds composed of pre-ipo companies)
  3. Crypto - can be very risky

Disclaimer: I have a mix of all 3 in my portfolio but these account for around 6% of my investment portfolio, much less in terms of NW (2-3%)

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7

Hey Steve,

thanks for the insightful recommendations.

I think what has drawn probably drawn all of us to VT is the simplicity involved.

But I think it’s an interesting intellectual excercise to think of some interesting ways to improve it. :slight_smile:

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I was reading about some additional ways to amplify returns and wanted to share with the community.

  1. Wisdom Tree Efficient Core ETFs (90% stock and 10% bond 6x = aggregated 1.5x leverage
  2. HCM Defender 100 Index ETF and other from Howard Capital management. They have various funds. Bottom line they use a proprietary methodology (HCM BuyLine) when to buy a stock or sector
  3. risk parity ETF
    3a) TYA Simplify Risk Parity Treasury ETF (basically playing with yield curve / duration)
    3b) latest one to be introduced that looks very interesting. RPAR Ultra Risk Parity ETF (UPAR), which is designed to provide leverage of 160%-to-180% to a risk balanced portfolio across four major asset classes (25% equities; 25% TIPS; 25% commodities; 25% treasuries) - link to fact sheet https://www.rparetf.com/fund-upload/fund_files-631638903266-ARRPARFS113021.pdf
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9

If we are already talking about more interesting etfs I would definitely add PSLDX to the mix. This is a fund by Pimco that kind of replicates Hedgefundies adventure at 2x since 2007. They have insanely high dividends >20% and still reasonable yearly costs at 0.59%.

However, they seem extremely tax inefficient for swiss investors… Do you think this still would be worth it?

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The returns are crazy. But I don’t understand what this fund is about and how it works. It holds bonds and other funds that hold futures and the like?

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A link here https://www.optimizedportfolio.com/psldx/

Their mutual fund PSLDX is roughly 50/50 stocks/bonds levered up 2x for effective 100/100 exposure, and as is the PIMCO way, they’re active on the bonds side, with the stocks side linked to the S&P 500 via derivatives. PIMCO call it the StocksPLUS® Long Duration Fund.

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12

I was more thinking about S&P500 mini futures MES. One lot is x5 S&P500, so around 24k USD now. And there are no dividends.

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I was delving deeper into the wonderland of risk parity.

Specifically with leveraged ETFs in the bond section.

The specific etf I am looking at is TMF. This ETF is 3x 20 Year US Treasury bonds.

According to portfolio visualizer you reach max Sharpe for roughly 75%-80% VT and 20%-25% TMF.

What this gives you is slight outperformance of VT roughly 10-20% while halving drawdowns.

What I also find quite interesting is that the correlation to US Market gets down to ~0.6 instead of almost 1 for VT für to having more bonds which imho is a good trait.

Please play devil’s advocate why shouldn’t I do this?

Taking this a step further you can start levering up and create a 160/40 split. This has comparable drawdowns to normal VT and much better returns. I am just not sure if I could stomach taking on margin and would probably more comfortable with doing this with leveraged ETFs. Sadly no 2x VT exists…

Let me know what your thoughts are. :slight_smile:

Backtest: Backtest Portfolio Asset Allocation

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14

@SteveDB

Interestingly, the first two resemble NSTX for an effective 80/60 equity/bond allocation vs the 90/60 for NSTX.

If you start levering up you are doing something similar to PSLDX.

However, PLSDX and Hedgefundies Adventure have an US bias which I would like to avoid.

However, for the bond part I think there might not be a good alternative to 20 Year US Treasury bonds that are also available as leveraged ETFs.

Or are you aware of one.

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The correlation coefficient of VT and TMF is -0.44, so maybe there is something in this strategy.

However, besides USDCHF risk, aren’t valuation of both stocks and bonds suppose to drop heavily during the infamous “upcoming increase of inflation”?

And, respectively, isn’t TMF CAGR of 12.56% driven by falling risk free rate?

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I agree that there is a currency risk involved here. However, as half of assets in VT are held in USD I already have quite some exposure.

I am a bit curious about the inflation statement. Would we need to go to an All-Weather portfolio type to combat this (i.e. including commodities as well)?! What would be interesting other strategies apart from holding cash?

Shouldn’t bond returns increase as the fed is hiking rates?

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Edit: Forget the last part I was mixing things up in regards to bond returns… :roll_eyes:

As an additional post there was an interesting post on Reddit going in a similar direction.

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This and other similar portfolio are suitable if your goal is preserving your capital. There are no miracles, you reduce volatility by sacrificing performance. If you have 10+ years of capital accumulation ahead of you, you should go for assets, with maximum expected long term return, i.e. stocks and ignore volatility.

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P.S. I keep scratching my head thinking about asset allocation, but didn’t find yet anything more useful than stocks (maybe leveraged) on one side and 2nd pillar+cash on the other side.

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One important clarification is that leverage should be used temporary. HEFA and PLSDX attempt to use this as timeless strategy. Last 10 years worked because of bull market and near zero interest rates.

Use of bond is to limit losses and rebalance. Plus US bond yields may go up, however as CH investor I believe there is a risk that any increase in USD bond yield will be lost in FX devaluation. Look USD or any other currency vs CHF over last 100 years.

I also agree that all these strategies are US based but I am not sure I would be comfortable with leverage fo le Europe or Emerging markets.

All of this leads me to think what i am planning without too much sophistication:

  • wait the next downturn
  • and then buy a 3x S&P500 (UPRO) or a mix of UPRO and TQQQ (3x nasdaq) if only nasdaq falls more than 30-40%.
  • leave 20-25% cash instead of bond

So 75:25 UPRO/cash or 50:25:25 UPRO/TQQQ/cash

Caveats:
a) to have a meaningful impact it has to be a good part of your portfolio / NW. something like 50% of the investable portfolio. 20% of NW
b) only after a downturn
c) aiming at 100-150% return
d) then start to apply stop losses at 85% of the value reached. Then gradually moving up stop losses until they get executed. In other words, I double the money, and then a ride the additional growth with stop losses
e) once stop loss is triggered. Wait and see and potentially invest back into VT

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