PP using futures

[jokerjoe]

I was wondering if anyone has any thoughts on replicating the PP using futures?

PROS:

• You could lever-up easily if you wanted to take on more risk.  As long as one is sensible I don't see leverage as a problem per se.
• You could sell calls against the position to boost returns, fairly deep to avoid being called away too often.  One could do the same with other products, but futures markets are more liquid.
• You could invest non-margined cash, which would be equivalent to most of your portfolio, in bonds. These would be of short duration and held to maturity to avoid duration risk, and a mix of credit-worthiness to boost yields. 
• No ETF fees.

CONS:

• Rollover risk.

[hpowders]

Ha! Ha! Futures. That's all I need.

[iwealth]

I was wondering if anyone has any thoughts on replicating the PP using futures?

PROS:

• You could lever-up easily if you wanted to take on more risk.  As long as one is sensible I don't see leverage as a problem per se.
• You could sell calls against the position to boost returns, fairly deep to avoid being called away too often.  One could do the same with other products, but futures markets are more liquid.
• You could invest non-margined cash, which would be equivalent to most of your portfolio, in bonds. These would be of short duration and held to maturity to avoid duration risk, and a mix of credit-worthiness to boost yields.   
• No ETF fees.

CONS:

• Rollover risk.

No, but only because my knowledge of futures is limited. Also limited as it relates to tax treatment. For a dummy, can you elaborate a bit on the rollover risk?

[melveyr]

jokerjoe,

Before using futures I would explore going cashless, using small cap value for stocks, and using 30 year STRIPs for bonds. Those are some easy ways to get leverage as a small investor. But yes if you do want to dial up the risk I think futures would be the smartest way to do so. It is the closest you can get to borrowing at the risk free rate without being a bank.

I would worry about the costs of this, but if you have info on it please share. I think the real weakness of the PP is it is pitched as "one size fits all" allocation. However, I do think one can use leverage to dial in their risk profile, using more cash if the Vanilla PP is too risky, or even going negative cash (leverage) if it is not risky enough... Fun stuff 

[AdamA]

I was wondering if anyone has any thoughts on replicating the PP using futures?

PROS:

• You could lever-up easily if you wanted to take on more risk.  As long as one is sensible I don't see leverage as a problem per se.
• You could sell calls against the position to boost returns, fairly deep to avoid being called away too often.  One could do the same with other products, but futures markets are more liquid.
• You could invest non-margined cash, which would be equivalent to most of your portfolio, in bonds. These would be of short duration and held to maturity to avoid duration risk, and a mix of credit-worthiness to boost yields.   
• No ETF fees.

CONS:

• Rollover risk.

Here's a link where we discussed a similar strategy.

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2

[clacy]

Thanks for your input Slotline. I've often thought about this as an effective way to leverage, but I suppose it has it's share of challenges just like other forms of leverage.

Clearly as you say, you need a fairly significant account size.  The other stumbling block that I think is important, would be counter party risk.  I don't have an in depth understanding of futures, but I'm assuming there is less protection than holding mutual funds and ETF's.

If I had a $2mm account size, I may consider something like:

-$500k SHY (keep the cash portion unlevered)

-3 GC contracts

-7 ES contracts

-3 ZB contracts + some EDV to get it up to $500k worth of value

Most of the rest of the cash outside of margin (with some breathing room) could be put into a low volatility total return fund like PTTRX.

[jokerjoe]

Thanks for the comments, very helpful.

I see what you're saying about futures pricing assumes investment of cash into bonds.  I was just thinking that by taking on a bit more risk one could gain a percentage point or two.

Regarding contango v backwardation, the latter would actually work in your favour.  Though contango is generally the norm with gold.

[clacy]

Would contango with gold, be any worse than the costs associated with storage + management fees that you would have with ETF's?