PP Inspired Leveraged Portfolios

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Kbg
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PP Inspired Leveraged Portfolios

Post by Kbg » Sat Dec 30, 2017 4:29 pm

This thread is a continuation of the past couple of year's posts on the 20% Returns Thread found below as the topic matter has evolved.

viewtopic.php?f=10&t=603&start=564
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Re: PP Inspired Leveraged Portfolios

Post by ILoveMoney » Mon Jan 01, 2018 9:33 pm

Good luck to you with your new strategy. I'll be following along.
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Re: PP Inspired Leveraged Portfolios

Post by dragoncar » Tue Jan 02, 2018 2:50 am

Will rising rates affect the expenses on the 3x funds or your other strategy?
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Tue Jan 02, 2018 8:30 am

Hard to say...but most likely yes. Derivatives have interest rates baked into their pricing. But so do earnings, and bonds and CDs etc. Hence the reason for distinguishing between real and nominal returns/rates. Nominal is everywhere so it kinda doesn’t really matter at some level. In other words, inflation is ultimately the driver of higher interest rates which gets baked into pretty much everything. So costs will go up, but in a general way so will associated returns.

Finally, interest rates really don’t matter all that much vis a vis financial instruments unless they start going north of 5 or 6% ish.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Thu Jan 11, 2018 3:58 pm

There’s a good article on simulating UGLD since the 70s on SeekingAlpha today. I wish he would have segregated the data into decades. It would have more useful. Piard’s monthly decay post was posted today as well. Both are in the ETF section.

One of the main reasons I post is to educate. Tomorrow I will try to post on gold futures. Hopefully by the time I finish folks will have an idea if they may or may not be useful for their personal situation and preferences. Futures can seem very complex but one can boil down the topic to some key items.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Thu Jan 11, 2018 10:48 pm

Futures 101: https://www.cmegroup.com/education/file ... utures.pdf

I'm going to skip the basics; read the above if this whole topic is new/foreign to you. The title of this thread begins with PP inspired so let's make the discussion relevant.

The main things we need to consider when deciding whether or not to use futures are as follows: Costs, trading convenience, portfolio suitability, taxes. (I may think of more as I write, but I'll start here...additionally this may be a multi-poster. I'll write as much as I have time/desire to take on, make a logical break and pick it up where I leave off.)

When looking at costs I specifically mean trading costs. Tax affects will be covered later. Generally a thorough review of costs include spreads, commissions/trading fees and depth of book. When we discuss futures we also need to add the impact of futures contract contango/backwardization.

Using gold as an example to explore costs. (Note: Costs can and do evolve over time...the best we can do is see what our cost options are today)

If we go by the Gold FAQ it looks like the commission for physical gold is 5% plus a continuous cost of storage protection which if Google is correct and you don't have a lot of physical gold is going to be around $25 a year (safe deposit box). The details on the costs of protecting gold are beyond the scope of this post...but we do care about commissions and unless I misread the FAQ it would be a 10% haircut for buying and then selling.

ETFs: UGLD's spread according to ETF.com .09%, DGP's is .6% GLD's is .01% and IAU's .08%

Futures: GC (x100) .01%, OC (x50) .04%, MGC (x10) .02%

So let's do the spread math on our largest increment position size which is the GC futures contract with a value (tonight) of $132700 and make it a round trip.

Physical - $13,270 (ouch)

ETFs - $26.54 to $1592

Futures - $26.54 to $106.16

The math speaks for itself: GLD and the GC futures contract are the least cost winners when it comes to a single buy and sell.

Let's take a look at commissions now.

Physical - Covered in the spread calcs, so we will call this a "zero commission" trade

ETFs: Let's call it $10 round trip...could be a little more or a little less.

Futures: Let's call it $5 round trip...your mileage may vary

Management fees are the gift that keeps on giving annually

UGLD 1.35%, DGP .75%, GLD .40%, IAU .25%...for a three year hold $132700 turns into 127,392 (-4%/-$5308) for UGLD and 131,704 (-.75%/-$995) for IAU.

Note: A bit of rounding in the above figures and the assumption is zero change in underlying price.

An interesting point to note here...for a long term hold maybe that physical stuff isn't so bad at least as compared to say UGLD. I did this analysis in hard $$$ because I think it makes it more tangible than %%% reporting. Hopefully the fair reader has also noticed that based on your hold period (and frankly a bunch of other stuff we will eventually get to) what may be "best" ends up being a big "it depends." Yup, nothing is ever as easy as it seems.

I think I'm good for tonight and feel free to double check my calcs and assumptions. In fact, feel free to shred it if I missed something you think relevant...the point is to learn/bring all the useful info to bare on the subject. Tomorrow I'll hit the final cost component unique to futures...contango/backwardization and how the "spot" price for physical differs from the price of the future...this aspect can make a Trumpian YYYUUUGGEE difference on the returns we get. In fact, part of my real money port this year is an experiment in action so I get a better internal feel for the relevant dynamics and actual costs. I may get several months into what I am currently invested in and toss it overboard because of something learned along the way. Nothing like reality to help one learn.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Thu Jan 11, 2018 11:01 pm

Fun and useless factoid...that XIV I mentioned in the last thread is now at +812% since Feb 16. I really want to see it become a 10 bagger even if only for a day. The odds are pretty good as the denominator is getting pretty small compared to the numerator so it wouldn't take much...like a 8.9% change which is very doable in a short time for XIV. If it does I will sell it and buy it again in my IRA for pure psychological satisfaction (and to restart the mental clock)
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Re: PP Inspired Leveraged Portfolios

Post by clacy » Thu Jan 11, 2018 11:05 pm

Thanks kbg. I’ll be interested to read your post re backwardization/contango. Those topics are still a little fuzzy to me.


Although I do wonder if the leveraged ETF’s have backwardization and contango baked into their price as well. Do the the 2/3x ETF’s use futures as a way levering?
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Thu Jan 11, 2018 11:47 pm

If you look at UGLD's prospectus there is a section about the index used for the ETN.
The return on the ETNs of any series will be based on the performance of the applicable Index during the term of such ETNs. Each
series of ETNs tracks the daily performance of the S&P GSCI® Gold Index ER or the S&P GSCI® Silver Index ER (each such index, an
“Index” and collectively the “Indices”). Each Index comprises futures contracts on a single commodity and is calculated according to
the methodology of the S&P GSCI® Index (the “S&P GSCI”). The fluctuations in the values of the Indices are intended generally to
correlate with changes in the prices of such physical commodities in global markets. The S&P GSCI® Gold Index ER and the S&P
GSCI® Silver Index ER are composed entirely of gold or silver futures contracts, respectively.
Short version; it is an index based on gold futures less what you would get from cash if you bought the futures outright and invested the difference in T-Bills. ER is an abbreviation for Excess Return which really means without T-bill interest. So yes I would expect to see the same impact. The reality of UGLD is you are buying an unsecured debt note from Credit Suisse. They agree to give you the return of this index and you agree to give them 1.35% per year and the interest from T-bills in exchange. It doesn't really work that way for us little guys, but it does for the big guys who can exchange the notes directly with Credit Suisse. Not too worry...minus some tracking error we basically get the same benefit/costs. CS in turn hedges their risk however they deem best.

The reason I went to gold futures was I figured I could save some of the 1.35% and get a bit better than the T-Bill interest. Also, with futures you can gear up but also mitigate some volatility drag as compared to the daily reset.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Fri Jan 12, 2018 9:55 am

http://www.danielstrading.com/resources ... -guide.pdf

No bias in this source. ;) However, I thought the examples used and specifics of gold futures was useful for building the knowledge base. I’m trying to find something comprehensive that provides good info on gold spot vs. futures returns.

Update...no luck on finding anything comprehensive. I’m quite confident that the vast majority of time gold is in contango which means if we are long, then we lose some money vs. spot. Currently spot vs. the Dec GC contract shows that with no price change holding the Dec future would result in a ~2% loss at expiry. Theoretically if you buy the future you should be investing the difference between the margin requirement and spot in ST treasuries to be efficient with your excess cash. And this spread is definitely baked into the price of the future. If you invested the excess cash then the delta would be around -.55% as IIRC 4 week Tbills were around 1.45% last week.

I will say one thing that is very good about futures vs. other financial instruments...the real costs of being invested are normally captured and transmitted to the appropriate bearer of said costs very efficiently. In other instruments they tend to be buried deep in the fine print (ala the UGLD prospectus) or a bit more nebulous to define (like how much is a safe deposit box going to cost).

Of interest (to me) I just discovered I can buy gold spot as a currency cross to the US dollar at my brokerage. I need to dive into this. If I can do so on margin similar or better than the future this will be a very good development. I also need to check out minimum size allowed. The nice thing about this is that the difference is likely to be LIBOR or something close to it...and really there is no escaping the cost of cash pretty much anywhere in the financial world. No free lunches and all that.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Fri Jan 12, 2018 12:29 pm

Or not...not available to US investors.
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Re: PP Inspired Leveraged Portfolios

Post by ozzy » Fri Feb 02, 2018 7:34 pm

Here's a good article released today on combining leveraged and non-leveraged PP assets to increase overall performance. I've been implementing my own version of this for years and its been great:

https://seekingalpha.com/article/414276 ... erage#alt1
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Fri Feb 02, 2018 8:19 pm

Well this week hasn’t been very much fun has it? :-).

Nothing like a correlated drawdown in everything you own. Even my STBs are down. The portfolio I moved to has not had a good year, losing to pretty much everything.

It’s all good though. Risk assets come with...get ready for it...risk! 2016/17 were quite kind to us however.

Life has gotten way busy as of late so not much in the way of posting. If February is a bad month I’ll post a performance update. If it turns out well I’ll wait for the end of the quarter.

Thanks for the post Ozzy, I had just finished reading the article before I came here. I think MV ports with leverage are very PP like philosophically. And while we can’t bank 100% on history repeating itself to come up with the weighting mix for a couple of significant reasons and some minor ones, I think the methodology is probably a bit better conceptually than equal weighting. I’m not a fan of using short term lookbacks for determining weighting. It has a nasty habit of setting you up for a big allocation to something that does a nice swan dive as bull markets also are low volatility markets. I think it is fine if you use multi year lookbacks so that you are estimating average volatility over a long period.
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Re: PP Inspired Leveraged Portfolios

Post by dragoncar » Tue Feb 06, 2018 2:34 pm

How bout that xiv? I know you expected it to blow up some time but ouch.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Wed Feb 07, 2018 12:01 am

Yup not fun and not happy about it, Particularly given how it happened. However, over the years I’ve made more money than I lost or am pretty close to break even. I have the stuff in several accounts but all properly position sized...so no serious damage done. One account I took on too large a chunk offset by a big chunk of LTTs...so down 25% on that one (including other holdings also down). The rest are down 12ish%.

Actually my only serious regret was being in XIV vs SVXY.

As mentioned, not happy about it (at all) but I was fully prepared to take the size of loss I did and did not overdo it for my risk tolerance level. If SVXY behaves well I’ll probably jump on the horse again.

One lesson for sure...never ever invest in anything backed by Credit Suisse. That’s the second time they’ve walked away from a product. I suspect there is some serious thinking going on about SVXY beyond ProShares and predict if it also crumbles the entire volatility space will go down.

And I seriously hope folks who copied anything I did paid attention and followed my constant harping / advice on risk control.
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Re: PP Inspired Leveraged Portfolios

Post by clacy » Wed Feb 07, 2018 2:44 pm

Looks like XIV is trading again. It could be a good time to buy some additional shares at a 90% discount??
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Wed Feb 07, 2018 3:42 pm

If one is so inclined I would go with SVXY and deal with the K-1 (which isn’t that bad, they just don’t come out until March). Credit Suisse is now on my list of never buy anything with their name on it. They have tubed two of their ETFs now due to poor management.
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Re: PP Inspired Leveraged Portfolios

Post by iwealth » Thu Feb 08, 2018 7:51 am

Sorry this happened to you kbg. This was actually a fascinating case study. Here's what I took away from it:

I'm going to use the term "M1/M2" to represent the basket of VIX futures XIV inversely tracks.

Intraday XIV only has a hypothetical NAV. CS isn't wheeling and dealing M1/M2 all day long. They settle at the end of the day. Traders bid the price of XIV up and down during the day not just to match the M1/M2 move, but also to where they predict M1/M2 will move.

XIV closed at $99. CS had yet to perform their daily settlement. VIX futures markets close at 4:15. The $99 XIV misprice was caused by 1) traders not calculating hypothetical NAV, and 2) traders making a big bet that regardless of the hypothetical NAV, volatility would continue to ease (I say continue because there was a massive volatility spike during the 1600 pt Dow drop that eased significantly already). This is where everyone including the pros got caught with their pants down.

Sometime between 4:00-4:15pm, CS started to rebalance their M1/M2 positions to reflect the inverse of the daily change in the price of M1/M2. The magnitude of the volatility spike during the day meant this would require buying a LOT of M1/M2 contracts. This drove the price of M1/M2 higher and higher as they purchased enough contracts to meet the goals stated in the prospectus. Ironically perhaps, the prospectus even states that a a negative feedback loop is a distinct possibility and that the rebalancing may adversely move the price against themselves - this is what happened and this is what blew up the fund.

No more inverse VIX products for me. I'd rather short VXX if I was feeling so daring.
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Re: PP Inspired Leveraged Portfolios

Post by dragoncar » Thu Feb 08, 2018 8:47 pm

I found it interesting that this was posted last year:

https://www.zerohedge.com/news/2017-07- ... might-look

I only understand some of those words. Glad I got cold feet about XIV (I held it briefly but realized I didn't fully understand it), plus KGBs ending of the 3x ETF thread coincided with my need to liquidate that experiment to meet other investing needs. Got really lucky all around, but glad KGB still has lifetime gains from that product.

Just be glad you're not this guy who bout XIV on margin: https://np.reddit.com/r/wallstreetbets/ ... g/dtssuqa/
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Thu Feb 08, 2018 9:02 pm

I got really curious about my net since 2011...my accounts have grown over the years so of course I had the most money in XIV this year, but using tonight's price (i.e. what I lost) vs. gains over the years the trade has returned 32% since 2011. Not great but not a total waste of time. In other words, net positive.
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Mon Feb 12, 2018 9:16 pm

So with the blow up I’m retooling what I was going to track/post on here. I’m thinking 20% st vol was a bit much. :-)

I’m looking at something Golden Butterflyish. Selling vol will still be a part of it but looking at different forms. Could be just a switch to SVXY.
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Re: PP Inspired Leveraged Portfolios

Post by pugchief » Tue Feb 13, 2018 8:36 pm

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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Fri Feb 23, 2018 1:14 pm

I'm not sure this is all that new and improved and maybe I should go back to the other thread for continuity purposes and let this one die. Thoughts?

In any event, the recent XIV unpleasantness was not super fun to my portfolios but a base planning assumption for my allocation to XIV was that it could all one day go poof. So I lost what I thought I could take and not freak out/damage my portfolio beyond what I could accept. After redoing all my old analysis with the new data it became pretty clear that the risk to reward balance was found lacking as compared to other options. So here is the new allocation which is sorta but not really Golden Butterfly-ish.

The basics will stay the same: amp up to round 2x using 3x ETFs to increase our cash stash while realizing we are going to take some volatility decay hit.

What is different:

Portfolio Allocation
- For the aggressive part (stocks)...ditch XIV and UPRO/SPXL and replace with TQQQ @ 28%
-- TQQQ provides similar/better performance and is far less likely to go poof (use futures if your account is big enough)
- For LTTs dial down TMF to 13.5% (use futures if your account is big enough)
- For Gold dial down UGLD to 13.5% (use futures if your account is big enough)
- For cash take on a bit more risk and replace SHY with VCSH @ 45%. For those not keen on VCSH, SHY, VGSH or your favorite super safe cash/STB fund/ETF will work or use rolling 4-week T-Bills

Risk Control
- Because our backtests indicate around a 22% draw down during the financial crisis we are going to slap on an absolute momentum filter whereby the base (non-leveraged version) assets with the exception of VCSH must be returns positive over the previous 100 market days. That not allocated will go into VCSH.
- The downside is we are going to give up a bit when the markets are going up cuz we are gonna get smacked with whipsaw from time to time...them's the tradeoffs.

Benchmark
- We will compare ourselves to VGSH @ 50% with 16.66 to UPRO, TMF and UGLD
- We expect to do worse in a stock bear market, we expect to do better in a stock bull market
Last edited by Kbg on Fri Feb 23, 2018 4:15 pm, edited 1 time in total.
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Re: PP Inspired Leveraged Portfolios

Post by stuper1 » Fri Feb 23, 2018 2:44 pm

Are there rebalancing rules?

Is this a thing where you check once a month but only trade if your absolute momentum signal changes or if you need to rebalance?
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Re: PP Inspired Leveraged Portfolios

Post by Kbg » Fri Feb 23, 2018 4:27 pm

One could check monthly or more frequently. The 100 market days return test is checked monthly and the portfolio was rebalanced monthly for the backtest. Personally I would check returns once a month minimum and rebalance at a level one feels comfortable with. One could use 125, 133 or 150% of target allocation. I don't see much difference performance wise vs. what has been posted about quite a bit in the PP rebalancing discussion threads. The fact is whether rebalancing is helpful or hurtful is totally dependent on what happens in the future...more bouncy, rebalance more, more trendy, rebalance less. As I've posted many times in many places here...rebalancing is about risk control not performance. In the other thread I posted my personal technique...hit a band, then wait for a pause point in something that has been trending and pull the trigger.
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