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

[dragoncar]

Now that the PP is running again, i am a  bit nervous about the Deutsche Bank index swaps in UPRO. Its possible that DB will go into bankruptcy this year, so are you sure that the swaps are safe?

Good question- is there a better alternative?  I see KGB uses SPXL instead.  No sweat off my back to switch since this is in tax deferred, but every fund will have its own set of risks no?

Exposure down to 18% after today... (Looks like it recovered from intraday lows).  One bad day and I'll have to decide if a 15% exposure necessitates a rebalance event

[Kbg]

With UGLD going into the vertical today I hit the rebalance band for UGLD and was so close on TMF that I just rebalanced the whole portfolio. My rebalance points happen if an asset gets to 8.34% or 25% of the portfolio and annually.

The 2x version is up 11% this year. Personal version is up 9% with the difference being I have an added dash of XIV which is stinking up the place along with stocks this year. Overall I am up 11.86% since starting the leveraged PP in Mar 2014. 2015 was definitely a trial of the PP faith.

[Kbg]

Now that the PP is running again, i am a  bit nervous about the Deutsche Bank index swaps in UPRO. Its possible that DB will go into bankruptcy this year, so are you sure that the swaps are safe?

Good question- is there a better alternative?  I see KGB uses SPXL instead.  No sweat off my back to switch since this is in tax deferred, but every fund will have its own set of risks no?

I use SPXL due to volume...it's quite a bit better. What I'm a bit nervous about is the SEC proposal to get rid of 3x ETFs in the U.S. This may cause quite a bit of dislocation in price for a bit, but I think one would be unwound involuntarily at the market price on the last day of trading.  Some research I need to do.

Of interest, UGLD avg volume has about doubled and has had its two highest ever daily volumes in the past month.

[dragoncar]

My rebalance points happen if an asset gets to 8.34% or 25% of the portfolio and annually.

so like a 50% increase or decrease?

That's similar to the 15/35 bands

BTW, will you rebalance multiple times per year/month if necessary?

[Kbg]

My rebalance points happen if an asset gets to 8.34% or 25% of the portfolio and annually.

so like a 50% increase or decrease?

That's similar to the 15/35 bands

BTW, will you rebalance multiple times per year/month if necessary?

Yes, 50%.

I've only had it happen once since I started which was what I posted on...even with 3x ETFs. I may have missed a rebalance in UGLD last year when it spiked, but I was traveling on business.

I would rebalance whenever my thresholds are met mainly as a risk control measure unless there was a strong no-brainer reason not to.  There is just no way of knowing whether rebalancing is a good thing or bad thing as it is path dependent which is unknowable. As a general rule, it is good to rebalance highly volatile instruments and in academic studies has been noted to provide a premium. A no-brainer reason for not rebalancing would be something like a major bear market where thereafter it is highly probable that the stock market will perform very well for 2-3 years. A FED tightening cycle would be another reason assuming there was definite inflation with gold on an upswing.

However, I would rebalance regardless annually.

[dragoncar]

Looks like decay has been a problem the last couple months (just from a quick look at the charts).  Agree/disagree?

[Kbg]

Looks like decay has been a problem the last couple months (just from a quick look at the charts).  Agree/disagree?

One would need a start date and a calculator...and, I didn't really lock in on the "last couple of months" and just quickly did from 2/2/16 to today's close.

TMF is slightly better than 3x at about .3% pts

SPXL is slightly worse at by about .7% pts

UGLD is slightly worse at .01% pts

As I repeatedly mention it is all about path dependency.

Last year was awful for decay...truly awful.

From 2014 to today

UGLD significant decay, TMF over 3x returns and SPXL had significant decay

From 2013

UGLD is down 10% pts less than GLD would be down x 3, SPXL is 3% pts better than SPY x 3 and TMF returned 2x TLT  vice 3x (significant decay)

If we notionally invested 10K in a 1x and a 3x with no rebalancing...

Starting in 2013 we would be at 11% vs. 30.4%...2014 15% vs. 37% and 2015 2.2% vs. - 3.4%

And going back as far as we can...2012 we have 21% vs. 65%

As demonstrated above, every starting date paints a completely different decay picture. The theory we are trading here is to extend HB's basic premise about volatility counteracting in a good way when combined with harvesting positive volatility when it goes our way by rebalancing. Optimally that harvest gets added to an asset that is oversold to compound it.

I'm super curious to see how 2016 will work out as I rebalanced on 2/11 which thus far has proven to be a perfect rebalance point.  However, if UGLD and TMF continue to trend then it will be a performance decrement vs. an annual rebalance.

I also ran the numbers on a standard 1x PP vs a 50% SHY/16.67% others rebalanced annually (2x non-cash leverage)

2012 15.52% vs 30.90%, 2013 9.26/20.94, 2014 11.59/20.76, 2015 1.44/-.51

And voila...a 2x leveraged PP with 2x the cash.

[Kbg]

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 2/29/15

2.5x = 16.43%/-3.91%DD

2x = 11.18%/-2.78%DD

1.5x = 5.97%/-1.54%DD

1x = 5.29%/-.94%DD

Personal mix 11.66% as of 2/29/16

[Kbg]

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 3/31/16

2.5x = 18.82%/-3.91%DD

2x = 12.80%/-2.78%DD

1.5x = 6.82%/-1.54%DD

1x = 6.44%/-.94%DD

Personal mix 18.33% as of 3/31/16

Comment: My mix is close to the 2x portfolio. The extra was gained from rebalancing. The Dec - Feb plunge forced a rebalance and my small piece of XIV required a rebalance. With a portfolio like this one never feels good about pulling the rebalancing trigger, but over the longer haul it is wise to do so.

[ochotona]

I found a momentum strategy that claims a CAGR of 21.4% from 1971-2015. It's the proprietary, enhanced version of Gary Antonacci's GEM tactical strategy. It's only available through advisers.

"E-GEM Performance

Enhanced Global Equities Momentum (E-GEM) is our core proprietary dual momentum model. E-GEM is licensed to investment professionals and is our main investment program. E-GEM is also 60% of our more conservative Global Balanced Momentum (GBM) program. Please see our
fact sheet, Enhanced Dual Momentum, for more information on our programs.

Here is the theoretical backtest performance of E-GEM including how it compares to our popular Global Equities Momentum (GEM) model described in Gary Antonacci’s award-winning book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk.

January 1971-December 2015

                                                    E-GEM          GEM
Compound Annual Growth Rate    21.4%          16.8%
Standard Deviation                        14.6%          12.6%
Sharpe Ratio                                  1.07            0.87
Maximum Drawdown                    -24.3%        -17.8%"

*** NO YEARS WITH NEGATIVE RETURNS ***  (meaning the Sortino Ratio is infinite, because there is no deviation of negative returns, and you get a divide by zero error)

Net of advisory fee of 1.15%,  which includes all trades, with no other hidden fees, there is one negative year, 2008, when the return was -0.65%, and 1971-2015 CAGR decreases to 18.25%, Sharpe to 0.99

Needless to say, I am studying putting some of my assets under management with Rick Shrier. However, he has a high minimum balance requirement, so keep doing GEM until you get enough nickels pushed together.

[MachineGhost]

*** NO YEARS WITH NEGATIVE RETURNS ***  (meaning the Sortino Ratio is infinite, because there is no deviation of negative returns, and you get a divide by zero error)

Net of advisory fee of 1.15%,  which includes all trades, with no other hidden fees, there is one negative year, 2008, when the return was -0.65%, and 1971-2015 CAGR decreases to 18.25%, Sharpe to 0.99

Needless to say, I am studying putting some of my assets under management with Rick Shrier. However, he has a high minimum balance requirement, so keep doing GEM until you get enough nickels pushed together.

There's no need to pay someone to do this and 1.15% is excessive.  You can figure it out yourself since they're just upping the beta/leverage.  Also, first you say Sortino is infinite and they you say there's a negative year; make up your mind.

[ochotona]

There's no need to pay someone to do this and 1.15% is excessive.  You can figure it out yourself since they're just upping the beta/leverage.  Also, first you say Sortino is infinite and they you say there's a negative year; make up your mind.

No negative years before adviser fee is considered. One negative year with adviser fee. What the downside deviation when N=1 ?

I could try to reverse-engineer it, and keep all the gains for myself. But there's a real risk I could screw it up. I have a full-time job and a life outside of my portfolio. I think it's better if I watch the pro allocation live for a few years, then I might better understand whether or not I can dupe it myself.

[bedraggled]

What is the minimum to join E-GEM?

[ochotona]

I will send you a PM

[MachineGhost]

No negative years before adviser fee is considered. One negative year with adviser fee. What the downside deviation when N=1 ?

The downside deviation is whatever the minimum threshold was set to -- it doesn't have to be negative, just below.

[ILoveMoney]

I will send you a PM

Why not post the info here so all of us can benefit from what you have the say. : )

[ochotona]

I will send you a PM

Why not post the info here so all of us can benefit from what you have the say. : )

I don't want to reveal how much money I have by discussing the minimums

[ILoveMoney]

@ ochotona

Cool, no problem. I can respect that.

[Kbg]

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 4/29/16

2.5x = 23.81%/-3.91%DD

2x = 16.14%/-2.78%DD

1.5x = 8.50%/-1.54%DD

1x = 7.80%/-.94%DD

Personal mix  = 21.88%

Comment: Its been an exceptional year thus far.

[Kbg]

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 5/31/16

2.5x = 19.00%/-5.21%DD

2x = 12.91%/-3.77%DD

1.5x = 6.85%/-2.13%DD

1x = 6.82%/-1.43%DD

Personal mix = 21.33%

Comment: Its still an exceptional year thus far, though we are off from the portfolio high in April. Max DD also increased a bit. I'm hoping for a bit more up out of stocks as I'm getting close to another rebalance band. As seems to be the norm, PP continues to live or die on gold's performance it appears.

[Spectre]

http://www.wsj.com/articles/sec-moves-t ... 1465205401

It seems regulators want to get rid of the 2x and 3x leveraged ETFs, capping leverage at 1.5x, per the 1940's Investment Act?

Does this kill this strategy?

[Kbg]

It certainly will kill the 3x ETF version which I like due to its higher volatility AND the amount of straight cash you can hold for a given amount of exposure. If the account is big enough one could also do via futures, though that will add some complexity for sure and is likely not for most people. Currently the biggest problem with doing a 2x ETF version is the very poor liquidity and huge daily spread of UBT. However, if the rule does go through then I imagine UBT and/or newer 2x LTT ETF's liquidity will improve greatly. DGP which is a 2x gold ETF has OK liquidity, but I haven't followed the spreads on it for a long time so I have no idea what they might be.

In any event, if 3x go away we can expect more volume in 2x and I can't imagine Direxion won't move into the 2x space. If 3x really does get banned it is a major hit to their ETF line up. This may end up being a good thing as there will be better competition in the 2x space and perhaps fees will come down.

Lastly, the mathematics of leverage and normal market volatility generally are such that around 2x is about the sweet spot for positive benefits. Above 2 and the advantage gets worse and begins to plummet after (If I recall) around 3.5-4ish. Positive benefits meaning that you get the full boost of leverage (or its reverse) without a major performance hit from decay.

In terms of future ports unless you take out margin on leverage (a very bad idea in my view), the max one will be able to obtain will be a 1.75x port with only 25% cash. I will have to evaluate other alternatives, but if I stick with it likely I will simply notch down to a 1.5x which will enable keeping 50% in cash. I think if one is going to do this they need a good cash buffer to buy in when prices get hit hard.

Update: I just read (Dec 2015 posts) the SEC proposal would likely cut leverage to 1.5x so of course all my math above would be wrong and both Direxion and ProShares would have to totally revamp their leveraged ETF product lines. If this does end up being the case then costs/fees will become a major factor. If the fees stay as high as they are today then the net benefit over time of employing leverage might not be worth the additional risk given the much smaller potential gain. One alternative option would be to switch to single stock futures where you could get to above 300% leverage again. (with basically no margin buffer...so likely not executable). It would take quite a bit of time to figure out if doing SSFs would be a viable alternative. I'll do some analysis if this ends up going down, but if they really do go down to 1.5 my gut says it may no longer be worth it unless one moves to futures contracts which would require a very large account to pull off...but who knows maybe some futures will get "minied" even more to fill the gap that will be made. However, this is not likely unless someone feels there is a really good retail market. The big guys I'm sure simply will go the standard futures contract route.

[MachineGhost]

I haven't paid much attention to the leveraged PP's, but I'm wondering how is the "recovery factor" compared to being 100% in stock? i.e. when the 2x PP hits a -50% MaxDD, is the recovery time the same as the unleveraged PP or is it extended out and does it take longer than being 100% in stocks?

Also, you're saying you need a minimum of 2x leverage to overcome the daily decay and that 1.5x will nut cut it?

SSF's are easy. 20% margin deposit and you're good to go. Pricing near matches the underylyng too unless there's an upcoming dividend, etc.. However, 100 shares, 1 option ATM and 1 SSF all return the same amount in absolute terms. All that is different is the required margin to control it.

[Mr Vacuum]

Thanks for the continued analysis, kbg. I've been watching the 2x version in a Google finance portfolio and it's interesting to see it do its thing every day.

Mark Leavy's 2x PP with LTT, gold, and XIV may be another fallback if needed, but there's no cash in that one (and I've yet to wrap my head around how XIV actually works with the market).

[Mr Vacuum]

Oh, I can't read the article, but judging by the tone of the opening paragraph they may be cracking down on the inverse ETF as well.