20% annual returns over 40 years...interested?

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Kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 19, 2016 2:20 pm

M,

I have 5% of my personal mix in XIV and it comes out of the 50% cash. So cash is actually at 45%. Other options would be to nick the other three 1.67% or take it from the stock allocation. The latter would be most apples to apples but really XIV is a completely different risk premium (carry) as it is effectively continuous put selling.

I really debated pulling it from the port as most likely the short VIX selling type of strategies have seen their best days. The market in VIX futures has become WAY more efficient than the early days. XIV/SVXY are highly correlated with stocks and the leverage is roughly around a 3x ETF so one could make some very sound arguments that there isn't much value added over SPXL/UPRO. I would not debate that viewpoint strenuously. I have a small piece of it for the carry premium diversity and because it does very well in a flat choppy market (like now) whereas nothing else really does. So it gives just a tiny bit of diversification. Another more mellow option is ZIV or somewhere in between with both XIV and ZIV.

Note: XIV is highly risky stuff in a market that continues to evolve, be careful out there.
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Fri Aug 19, 2016 5:01 pm

My understanding is that in a flat market, XIV will do very well. But in a situation where stocks are dropping, won't holding XIV magnify your losses?
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 19, 2016 7:59 pm

Yes indeed. I think the simulated Max DD is like 95%. On the flip side it can do 300-600% multi-year runs afterward. One fallacy people often succumb to is looking at the scary figures/internet warnings that say if you go down 95% it will take a 900% rise to recover. (Or whatever the math is) This mathmatically is a hard truth but the real question is, is that all of your money or do you have a means to recharge the shot?

If no, you're screwed. If yes, then a 2-6x return on the initial loss over the next couple of years makes it a whole different equation...but you must have the spare cash to recharge. Lose a $100 make it back 50 years later not so great. Lose 100 make 300 a couple of years later, that's a worthy bet.

Obviously the rebound returns are critical to the scheme. Losing 95% and having follow on years of 10/20% isn't going to cut it.

This is NOT a port to do without a nice cash cushion. It's an essential element.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Aug 25, 2016 10:45 pm

I've been monitoring the hedged futures version of the PP for a month plus now and for those who are comfortable with and understand futures, I would have no problem recommending this approach in lieu of 3x ETF versions. Indeed, there is a very high probability I may switch to it and ditch the 3x ETF version. Costs will be substantially lower, volatility decay will not be an issue (but that could be bad in a good trend) and tax treatment is vastly superior in a taxable account. Some quick details on the paper portfolio:

My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)

Ticker symbols are...

Gold - MGC

Stocks - Long ES/Short YM

LTTs - Long UB/Short ZB

Precision balancing can be accomplished with GLD, SPY, DIA and TLT or one of their leveraged versions.

Assuming the max historical DD of the PP plus a little fudge factor, a minimum of $15K cash would be needed for this size portfolio. Notch cash up to $24.7K for a 2x VPPP.

The above combination was chosen to determine the minimum size portfolio practicable for doing a leveraged VPPP with futures but there are certainly many other possibilities and combinations that may be more suitable depending on individual circumstances and portfolio size. Additionally, there will be tracking error due to hedging as a way to enable a smaller portfolio. If you have the chops for a much larger portfolio the hedging aspect could be eliminated. See my post a while back on portfolio size using futures. Short version: UB is the long pole in the tent due to contract size. On the positive side, hedging directly will also substantially limit the likelihood of getting blown out of the water during a market spike caused by black swan or grey swan kind of events. If one wants to sleep better at night, I'd definitely hedge but of course that costs a bit more in commission and spreads.

Bottom line: A viable approach with some nice advantages. More work and a good understanding of futures required to pull it off in practical terms.

I will not be posting on this version any longer as the learning objective is completed.
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Fri Aug 26, 2016 7:59 am

Kbg wrote: My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)
As one who doesn't understand futures, does this mean you are leveraged 7.8x?

So if/when Yellen comes and opens her mouth and gold, for example, dumps $100 instantly, what happens? Margin call, and then are you at risk for anything not able to be gotten out of fast enough or is all that automated?

I know this is the variable portfolio topic, but I think it should be changed to the balls of steel speculation topic.

If I have this all wrong and there is little risk, then credit all the anecdotal stories I've heard of people getting wiped out in futures. Like those two old guys in Trading Places.
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Fri Aug 26, 2016 9:14 am

Cortopassi wrote:
Kbg wrote: My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)
As one who doesn't understand futures, does this mean you are leveraged 7.8x?

So if/when Yellen comes and opens her mouth and gold, for example, dumps $100 instantly, what happens? Margin call, and then are you at risk for anything not able to be gotten out of fast enough or is all that automated?

I know this is the variable portfolio topic, but I think it should be changed to the balls of steel speculation topic.

If I have this all wrong and there is little risk, then credit all the anecdotal stories I've heard of people getting wiped out in futures. Like those two old guys in Trading Places.
Margin is really nothing more than an exchange/broker minimum nominal threshold for holding a futures contract(s). So without checking the numbers, if $6.3k in margin gives you control of a PP worth approximately $49.4k, then yes that would be correct. However Kbg is not advocating for adding contracts for each $6.3k in ones account.

You can essentially dial in the leverage to suit your needs.

For example, someone with $50k in investable assets, under Kbg's plan you could run use $6.3k in margin to buy those futures, and use the other $43k to place in T-bills. In that scenario you would only be leveraged 1x as a total portfolio.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Fri Aug 26, 2016 9:50 am

I understand futures in general but have no experience with them. I'd be interested in seeing a play by play for any paper trades you do to understand the mechanics involved
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Re: 20% annual returns over 40 years...interested?

Post by iwealth » Fri Aug 26, 2016 9:56 am

Kbg wrote:and tax treatment is vastly superior in a taxable account
This wouldn't necessarily be true if you only rebalance yearly which I believe you've advocated if running a VP with the 3x ETFs...right?
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 26, 2016 10:12 am

MGC is the micro gold contract and = to 10 oz, so right now $13K and change per contract. Let's say gold dumps a $100 instantaneously then with this contract you would need at least 1000 in cash and if it is in your account exactly nothing happens. Futures are marked to market daily which means if you have a losing day your brokerage takes out whatever you lost from your account in cash at the end of the day. If you have a winning day the opposite occurs. Additionally, overnight margin/contract margin is set for extreme moves and how it is established is using world class risk analysis algorithms. So at $6300 per 49K that means you are geared for almost a 13% negative intraday move.

If you step back and think about it there is nothing different going on with your account. If you are holding equivalent GLD, real gold or MGC and gold dumps $100 then you are down $1000 period. The only difference with a futures contract is $1000 is going to be taken away at the end of the day from your cash balance...but your EOD overall account balance will be exactly the same.
From a pure monetary stand point there is exactly zero difference between 10oz of gold in a futures contract, an ETF or real gold. Obviously the three have different instrument characteristics.

Futures get a bad wrap due to stupidity but assuming the cash value of the contract is fully backed with that amount of cash they are no more or less dangerous than the physical or ETF version. We can have a debate about the merits of physical vs. a future and one would get no real argument from me on the physical. With regard to the ETF versions I'd argue futures are at least as safe and probably more safe. With regard to cost, there is simply no comparison. The future will be much cheaper,to hold.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 26, 2016 10:28 am

iwealth wrote:
Kbg wrote:and tax treatment is vastly superior in a taxable account
This wouldn't necessarily be true if you only rebalance yearly which I believe you've advocated if running a VP with the 3x ETFs...right?
Correct for stock and LTTs...physical gold is different of course and someone would need to dig into that one.

In a taxable account ST and LT gains are taxed according to holding length. Futures are always 40ST/60LT regardless of hold length. Hands down futures are my favorite asset class at tax time. You get a form from your broker, it has a gain or loss amount on one line, the 40/60 split on two other lines and that's it. All that hold length and wash sell tracking crap you have to do and report trade by trade is completely N/A. Tax loss harvesting also can't be done as there is no reason for it. The down side, and it is a significant one, is that like your daily brokerage account mark to market, on the 31st of December each year the chalk line will be snapped and if you are up for the year you are going to get taxed, if you are down the loss will be realized as well.

Good question...forced out a good issue to consider.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Sep 06, 2016 2:16 pm

For a 100K portfolio...

2.5x means 250K equivalent/25% each to SHY, TMF, UGLD, and SPXL/25K SHY and 225K (75K x3) equivalent everything else

2x means 200K equivalent/16.667 each to the above and 50% to SHY/50K SHY and 150K (50K x3) equivalent everything else

1.5x means 150K equivalent/8.333% each to the above and 75% to SHY/75K SHY and 75K (25K x3) equivalent everything else

1x means 100K/25% each to SHY, TLT, GLD, SPY

Purchase price was at the close 12/31/15 through the close on 8/31/16

2.5x = 36.70%/-5.79%DD

2x = 24.80%/-4.36%DD

1.5x = 12.94%/-2.59%DD

1x = 12.28%/-1.63%DD

Personal mix = 34.82%

Comment: August was a modestly down month. For my personal port there was an XIV rebalance and I'm now above my tracking bogey by 7.7% this year. Unless something goes crazy in the last hour of today's market, today will mark another new yearly high in the portfolio. Such a nice change from 2015 which pretty much sucked.

In watching my paper trading futures version of this, I think a good rule would be to roll the futures a month before expiration. There was an automatic force out of a position in UB due to not meeting IB's check on my ability to deliver actual LT treasuries and the MGC future and how it trades is still a bit of a mystery to me. Definitely more work to do in the futures version of this. Even if one is experienced in futures I recommend paper trading in your brokerage's paper trading account first to get a feel for the daily changes and mechanics of it.

Finally, while I'm trading a variation of the 2x version my favorite is still the 1.5x version. I predict here and now it is going to outperform the standard PP when/if interest rates begin to rise assuming one is in STTs for cash. It will receive the benefit of 3x the cash over a traditional PP.
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Tue Sep 06, 2016 4:28 pm

I may have misunderstood you, but shouldn't a 1.5x portfolio be 12.5% each SPXL/TMF/UGLD (with 62.5% SHY)?

That portfolio is up 19.9% YTD.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Sep 06, 2016 5:07 pm

This question came up at the end of last year which is why I explicitly post the math of the leverage computations. You can leverage the non cash component (what you did) or look at the total notional portfolio value from the base point of 100K as the leverage (how I'm tracking).

Using your numbers my method, the port is a 1.75x as the total notional value is 175K. In your method the active component is levered up to 1.5x as you note. Regardless, everyone should understand the results/risk are going to be driven by the amount of leverage employed to the active risk components.

There probably is a "correct" method for this and I may not be using it, but so long as everyone can see the math with transparency that is what matters most. In any event, your broker is going to report performance stats based on the starting value of the portfolio and not whatever we consider our portfolio to be leveraged to. All of the numbers I post are based on a 100K starting point. So assuming my starting point this year was 100K my personal port is now valued at $134820 for example. Percent performance would be 69.6% if I was only counting the risk assets...which doesn't make intuitive sense to me at a portfolio level.

Either way works, but for the reason noted in the last two sentences of the above para, I'm going to stick with the current method.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Sep 30, 2016 10:45 pm

For a 100K portfolio...

2.5x means 250K equivalent/25% each to SHY, TMF, UGLD, and SPXL/25K SHY and 225K (75K x3) equivalent everything else

2x means 200K equivalent/16.667 each to the above and 50% to SHY/50K SHY and 150K (50K x3) equivalent everything else

1.5x means 150K equivalent/8.333% each to the above and 75% to SHY/75K SHY and 75K (25K x3) equivalent everything else

1x means 100K/25% each to SHY, TLT, GLD, SPY

Purchase price was at the close 12/31/15 through the close on 9/30/16

2.5x = 35.56%/-9.56%DD

2x = 23.95%/-7.14%DD

1.5x = 12.58%/-4.12%DD

1x = 12.09%/-2.67%DD

Personal mix = 33.21%

Comment: ~ Doubled this year's MaxDD during September; but a nice comeback at EOM so just slightly below this year's high.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Nov 02, 2016 9:40 pm

For a 100K portfolio...

2.5x means 250K equivalent/25% each to SHY, TMF, UGLD, and SPXL/25K SHY and 225K (75K x3) equivalent everything else

2x means 200K equivalent/16.667 each to the above and 50% to SHY/50K SHY and 150K (50K x3) equivalent everything else

1.5x means 150K equivalent/8.333% each to the above and 75% to SHY/75K SHY and 75K (25K x3) equivalent everything else

1x means 100K/25% each to SHY, TLT, GLD, SPY

Purchase price was at the close 12/31/15 through the close on 10/31/16

2.5x = 24.71%/-15.10%DD

2x = 16.84%/-11.25%DD

1.5x = 9.01%/-6.45%DD

1x = 9.45%/-4.35%DD

Personal mix = 25.88%

Comment: In draw down mode with max dd's about doubling across the board. Note the compounding of the dd with all the leveraged versions under performing their leverage values.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Wed Nov 02, 2016 9:53 pm

Kbg wrote:Comment: In draw down mode with max dd's about doubling across the board. Note the compounding of the dd with all the leveraged versions under performing their leverage values.
So the delta is decreasing when prices go the wrong way? That would be pretty darn cool, if true.

So basically, so far, the leverage factor for the MaxDD is about 3.47x between 1 and 2.5 as a rule of thumb. So that would roughly imply a -62.46% to -86.75% MaxDD during the 1981 shock at the 2.5 level. Scary. Then again at 25%+ CAGR, getting back to breakeven probably won't take any longer than it did for the 1.

What might be more interesting with this leverage is using trend following to tighten up the risk while keeping the CAGR ridiculously elevated. That would be a lot easier to home brew than the intense way AAA does things.
Last edited by MachineGhost on Wed Nov 02, 2016 10:08 pm, edited 1 time in total.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Nov 02, 2016 10:05 pm

What you point out is one of the non-intuitive aspects of this...you actually lose less proportionately in a DD. But it is still 3xish so it sucks.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Wed Nov 02, 2016 10:12 pm

Kbg wrote:What you point out is one of the non-intuitive aspects of this...you actually lose less proportionately in a DD. But it is still 3xish so it sucks.
Maybe, but if you have confidence that the other side of the equation will make up for whatever MaxDD reaches, then there's no real problem (other than the PP breaking apart).

However, I do think using leverage without specifically risk normalizing the no-cash assets is just going to amplify the weighting errors between the assets. In 1 we can live with it because its so marginal and not worth the negatives to fix, but at 2.5? AFAIK, volatility does not scale linearly.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Wed Nov 02, 2016 10:18 pm

P.S. The idea of a Taleb portfolio with a leveraged PP sounds rather attractive after the last two years. Put 90% into I-Bonds and the remaining 10% into the most leveraged PP possible. I could really sleep at night with that compared to the stress of getting fully invested in 1x. Cash is almost magical. Cash is freedom to chose!
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Nov 03, 2016 8:51 am

I think something like XIV is vey good for a Taleb like strategy. XIV is basically another 3x ETF is a bull mkt but it excels in flat/chop.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Thu Nov 03, 2016 11:04 am

Kbg wrote:I think something like XIV is vey good for a Taleb like strategy. XIV is basically another 3x ETF is a bull mkt but it excels in flat/chop.
I have been pondering about backtesting volatility in the PP lately to see how it goes for downside protection. But the problem with the VIX ETFs is they don't act as expected because they're using futures contracts on the VIX not tracking the spot VIX per se. So I think these futures contracts based VIX ETFs are far better for arbitraging the uniquely resulting VIX smile than getting spot VIX exposure. Fortunately, there's now a ETF that tracks the spot VIX that just came out last year (its in my pile of paperwork somewhere).
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

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Re: 20% annual returns over 40 years...interested?

Post by TrickPony » Thu Nov 03, 2016 2:07 pm

Hello,
Is there anyway that you could post the results of this leveraged portfolio using 11.111 x 3 and SHY= 66.67?
I can remember in your old posts it was listed "just for the fun of it"
Thanks or any info
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Thu Nov 03, 2016 2:37 pm

11.1% each in SPXL, TMF and UGLD and the rest in SHY (rebalanced quarterly) is +12.4% YTD or 14.9% CAGR. Max DD -5.96% YTD
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Nov 03, 2016 6:52 pm

No rebalance YTD is 11.89/-8.18 and I get just a wee bit less on the quarterly 12.2/-5.83.

I would recommend this version to anybody, including grandma. Of note, when I was backtesting (simulated) this during the 70's (high inflation) the big cash portion was a very nice boost over the traditional PP.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Nov 03, 2016 6:58 pm

MachineGhost wrote:I have been pondering about backtesting volatility in the PP lately to see how it goes for downside protection. But the problem with the VIX ETFs is they don't act as expected because they're using futures contracts on the VIX not tracking the spot VIX per se. So I think these futures contracts based VIX ETFs are far better for arbitraging the uniquely resulting VIX smile than getting spot VIX exposure. Fortunately, there's now a ETF that tracks the spot VIX that just came out last year (its in my pile of paperwork somewhere).
I have a 5% long allocation to XIV and treat it as equity for portfolio purposes. Trading VIX ETF phenomenon is pretty well known now. There are trade offs and people get very cosmic with it, but the bottom line is you are selling (or buying) stock market insurance and sound insurance business practices should be applied (sell when everyone wants it, have a big reserve). Anything more is messing at the margins.
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