Thoughts about Hedgefundie's adventure?

I didn’t forget about your question, was just gathering experience, both technical and emotional. I am still not finished. But I can tell you that I would never take a position in futures more than 25% of what I have at IB. I am counting roughly with a sudden drop of portfolio value by 50%. In this case I am 50% of original value in stocks. Margin requirements are 50%, so I can still have a negative cash position equal to 25% of original value. With futures I am at roughly -12% in cash, so my positions are still alive.

It would be extremely stupid to wipe out my life’s savings in an occasional market dip and it would certainly have very serious personal consequences.

So with this constraint I can take only one micro S&P500 future. I was also thinking about a separate small portfolio with a high leverage, but - why would I take more risk for the same absolute exposure?

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Hey everyone,

with the recent downwards trend did someone actually put the strategies into practice we talked about?

I am considering going on portfolio margin and slowly leverage up to max 2x buying each month as long as VT is under my average buying cost.

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Can i ask you what you plant to do if: once you are at x2 and it keeps dropping?

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I went heavy on 3x ETF (biotech, China and internet stocks) in mid March during the first leg down.

These 3x ETF are down another 50-60% since I purchased these. Ouch!

I don’t think we are near the bottom yet but I am disciplining DCA only at pay-day and not much more than that given uncertainty on when the rebound.

Nerves of steel!

Disclosure: I have an additional cash reserve but don’t want to deploy it now. Maybe I am little afraid we are not out of the tunnel yet

Because of the way they are functioning: buying more derivatives when prices go up and selling them and the collateral when prices go down. If instead you would buy futures or went on margin, you would be somewhere around 0 in USD and probably in profit in CHF.

I have not sold them. I think you would be still down if you buy on margin.

Just to be clear. As an example:
A) I entered biotech 3x when the underlying index (XBI) lost already 50% from ATH
B) then index lost another 15-20%, which roughly means another 50% on a 3x ETF
C) so my 3x ETF is down 50%

If I would have got futures or bought XBI on margin at point in time A (above). I would be still down, wouldn’t I?

For reference, let’s check facts UPRO (3x S&P500)

  • if you invested in covid bottom, you would have made 7x your investment when reaching ATH again
  • after the recent decline upro is still higher than pre-covid, albeit close

Ok sorry, I thought you are talking about standard indices. Still I think constant leverage ETFs are less efficient than self made leverage solutions.

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On the other thought, I should look closer at 3x or maybe 2x leveraged ETFs.

they are a scam and not worth it.
The value of those token will decrease over longer time frames, please for your NV avoid.

I believe you right! But let me elaborate some more on my experience and how can be helpful to others.

a) 3x ETF to be used only for short periods of time. I agree over long periods the probability of this vehicle to never reach prior peak is very real. It’s math, it always takes longer to go back up then going down on % basis
b) 3x ETF move wildly. Does not matter how much you looked the graphs. Once you are in, it’s a wild roller coaster
c) attention to cost. 3x ETF are derivatives as IR increase so could costs

When I think we could these

  1. short period of time
  2. use for a small part of your NW
  3. have a plan on when to enter / exit
  4. use after a downturn
  5. don’t get greedy
  6. don’t use if you are risk adverse
  7. don’t use if you have a short investment horizon (less than 5-7y)
  8. don’t use if you don’t understand well finance and have traded for at least 10 years

I can’t say I mastered all of these elements but I am still learning and improving on the go

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That’s a good point. :smiley:
With my current approach I could go for 1-2 years before hitting 2x with various further decreases.

Once I would hit that amount I would continue my monthly buying which should deleverage the position slightly.

Going further I am monitoring my maintenance margin a bit more to judge how high this would need to be in relation to the % of downturn.

In summary, I am starting my portfolio margin journey very carefully and am also very aware of negative stories (Markettimer in the boglehead forum. I just believe that for younger investors it’s an interesting concept (aka lifecycle investing).

Seeing @johndoe1’s thread on leveraged portfolios I remembered this article I read a while back that analyzes Hedgefundie’s portfolio: Why Not Use Leverage? – Another Tug on the Lever – Mindfully Investing

To me, it’s interesting to see how leveraged portfolios might behave depending on different market conditions and sequences. It’s not only about that “freak” risk of having a 33% single-day downturn, but there are also longer-term risks.

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Thanks, this actually helped me staying away from the temptation of leveraged ETFs :smile:

BTW, is there any unbiased (non-corporate) academic research on long-term investing in leveraged ETFs, adressing volatility decay, returns in different market conditions and reliable long-term backtesting? Haven’t found much helpful stuff, e.g. on Hedgefundie-type strategies. I wonder why?

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This guy likes to leverage standard portfolios (link from @kraphael )

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One strategy that I am following is Lifecycle Investing which has been investigated and backtested by two professors from Yale.

The basic concept is that young investors can profit by using margin which basically let’s them invest their future (much higher) earnings now.

In practice that means taking on reasonable leverage (up to 2x) and then deleveraging with age.

Doing this with portfolio margin on ibkr suits my risk tolerance as very significant dropdowns would be needed to cause a margin call.

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Not exactly what I’d call academic research, but interesting nevertheless :grin:

Assuming high interest rates at current levels persist, wouldn’t you bleed out slowly?

They have tested with margin rates as high as 5% and still found a positive edge. So we still have some way to go. :wink:

Excellent, going to dig into this, just out of curiosity, you already got me at mentioning Yale professors :grin:

Risk parity is supposedly sound, and works through leverage (but should leverage the bond component not the volatile assets).

Tho in practice it’s hard to implement diy and there’s been some “interesting” correlations in recent years.

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