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Global Macro Trading Journal
- Thread starter Daal
- Start date
Yes this was a huge issue for me with Northern Rock, and a few other stocks as well.
But the approx. 8 year wait for Northern Rock to be marked as zero was ridiculous.
.
You had to pay for the borrow during the whole period?Yes this was a huge issue for me with Northern Rock, and a few other stocks as well.
But the approx. 8 year wait for Northern Rock to be marked as zero was ridiculous.
.
You had to pay for the borrow during the whole period?
Probably not - although I can't remember exactly.
When I wrote "huge issue", I was thinking more in terms of:
(1) Not knowing when the position could be marked as zero to free up the capital
(2) The potential for the borrow fee to increase
(3) That I was stuck in the position with no foreseeable end date - similar to (1) above
.
I like to get involved in Fed futures when I see a big discrepancy between market expectation and what I think the Fed will do. At this time, with the Fed signaling dovishness, I find it tough to bank on the long side there. If they were being studborn hawks there would be an easy trade there but looking at how much rates have come down in the last 3-4 months, I would tend to think of this as more of a marginal trade. Unless, its a recession call, which I wouldn't make it a this timeInteresting times we live in.
I'm not sure about outright ES shorts, but long Dec 2020 Fed funds is looking increasingly good here.
Daal, you may have discussed this before at some point but I just came across your journal. I scanned through a few of your posts though and see that you're very risk-conscious--and also seem to discuss optimization of investments regularly.
This question is fairly general, but what are your thoughts on how to best approach setting a risk budget as a retail investor? It'll be a few paragraphs but I want to try to short-hand the path of my thought process on long-term investing since I started really thinking about it a few years ago.
I notice that unsophisticated retail generally seems to over-allocate to risk assets in order to get paid. And although sub-optimal; if one still has a decent amount of time left on a healthy career, it usually works out in the long run. Twenty years later there's a decent chance the portfolio value will have a similar overall CAGR to an all-weather portfolio although they will have absorbed a lot more risk to get there.
So for the leverage-averse, sharpe is less significant until the portfolio needs to get drawn on. For the growth period there could be incentive for these folks to hold even less efficient assets that have higher beta. As long as they don't become insolvent and there is a long enough time horizon it could work out to a better absolute outcome.
This question is fairly general, but what are your thoughts on how to best approach setting a risk budget as a retail investor? It'll be a few paragraphs but I want to try to short-hand the path of my thought process on long-term investing since I started really thinking about it a few years ago.
I notice that unsophisticated retail generally seems to over-allocate to risk assets in order to get paid. And although sub-optimal; if one still has a decent amount of time left on a healthy career, it usually works out in the long run. Twenty years later there's a decent chance the portfolio value will have a similar overall CAGR to an all-weather portfolio although they will have absorbed a lot more risk to get there.
So for the leverage-averse, sharpe is less significant until the portfolio needs to get drawn on. For the growth period there could be incentive for these folks to hold even less efficient assets that have higher beta. As long as they don't become insolvent and there is a long enough time horizon it could work out to a better absolute outcome.
That being said, what do you think is the best way for someone who does have a mind for optimization/diversification to transplant some of this growth mindset to end up with a better absolute outcome specifically in the growth phase than someone in the scenario above? You can invest much smarter than the example above; keep portfolio value much healthier in recessions, but at the end of this phase there's a decent chance it won't manifest into a superior $ value. Even though afterwards when capital preservation and drawing from portfolio become a factor the outcomes will finally improve over stock-heavy retails.
The easiest answer to outperform the un-efficient is obviously to lever up a better portfolio. And there is a drag since leverage has a cost, but there should still be higher overall returns. This is my reasoning so far.. then the question is how to best manage the leverage. You can use historic drawdowns to stress test and try to ensure that margin availability isn't interfered with. But there's still a lot of unknowns. Like a new scenario that slightly overshoots your projections and you weren't prepared for the risk. Should we give an even wider berth and hope to be able to absorb that too, or create a failsafe of some sort instead?
Anyway, I get to this frontier of my knowledge and don't have a clear course of action yet. I've been running what I feel is a well-balanced allocation levered up to a hypothetical black swan DD of ~40%. I notice you are very risk-aware, but seem to have used that almost solely to slash risk/DD and not to produce higher returns. I know this is kind of an essay, but do you have any general thoughts?
Thanks,
Magic
The easiest answer to outperform the un-efficient is obviously to lever up a better portfolio. And there is a drag since leverage has a cost, but there should still be higher overall returns. This is my reasoning so far.. then the question is how to best manage the leverage. You can use historic drawdowns to stress test and try to ensure that margin availability isn't interfered with. But there's still a lot of unknowns. Like a new scenario that slightly overshoots your projections and you weren't prepared for the risk. Should we give an even wider berth and hope to be able to absorb that too, or create a failsafe of some sort instead?
Anyway, I get to this frontier of my knowledge and don't have a clear course of action yet. I've been running what I feel is a well-balanced allocation levered up to a hypothetical black swan DD of ~40%. I notice you are very risk-aware, but seem to have used that almost solely to slash risk/DD and not to produce higher returns. I know this is kind of an essay, but do you have any general thoughts?
Thanks,
Magic
That being said, what do you think is the best way for someone who does have a mind for optimization/diversification to transplant some of this growth mindset to end up with a better absolute outcome specifically in the growth phase than someone in the scenario above? You can invest much smarter than the example above; keep portfolio value much healthier in recessions, but at the end of this phase there's a decent chance it won't manifest into a superior $ value. Even though afterwards when capital preservation and drawing from portfolio become a factor the outcomes will finally improve over stock-heavy retails.
The easiest answer to outperform the un-efficient is obviously to lever up a better portfolio. And there is a drag since leverage has a cost, but there should still be higher overall returns. This is my reasoning so far.. then the question is how to best manage the leverage. You can use historic drawdowns to stress test and try to ensure that margin availability isn't interfered with. But there's still a lot of unknowns. Like a new scenario that slightly overshoots your projections and you weren't prepared for the risk. Should we give an even wider berth and hope to be able to absorb that too, or create a failsafe of some sort instead?
Anyway, I get to this frontier of my knowledge and don't have a clear course of action yet. I've been running what I feel is a well-balanced allocation levered up to a hypothetical black swan DD of ~40%. I notice you are very risk-aware, but seem to have used that almost solely to slash risk/DD and not to produce higher returns. I know this is kind of an essay, but do you have any general thoughts?
Thanks,
Magic
Thanks of the question. As I understand there are two main ways to boost returns while still remaining risk concious:
1) The one you mentioned. Which is to lever up a 'optimal' AA all weather style allocation. This is method preferred by Dalio in his passive fund. It does make sense in theory. A 'ideal' allocation of 30% stocks 55% 10y Bonds and 15% Gold has an historical max real drawdown of -26% from 1926 to 2018. If you levered it up it would still be quite a bit away from -100%. So that could juice up returns while still controlling for risk, so its likely to produce a better overall risk adjusted returns vs stock heavy portfolios
2) The one I use. What I did was to try to learn what produces great risk adjusted returns in portfolios. To understand why is that 30/55/15 portfolio good (risk adjusted wise) vs other portfolios. And my conclusion (after extensive backtesting) was that its because it mimics the Taleb 'barbell' portfolio. If you think of bonds and gold as a single security (imagine if they came blundled together in an ETF), they would be a pretty darn stable store of value. They would perform during inflation like in the 70's, during deflation like in the 30's and during stable periods it would still grind up. So this is the 'safe asset' part of the barbell. Stocks is the risk part. Stocks are volatile but it can also produce huge exponential returns like in the 90's. That 30/55/15 is great in a risk adjusted sense because it keeps most of its exposure in a stable store of value and a limited amount in volatile high return exponential assets
By going into a more extreme, I was able to see that the best portfolio that could possible exist (in risk adjusted terms) would be to keep 99% in a very stable store of value and 1% in early stage technology startup's (like the FB's of the world). You have the potential to become super rich but pretty much remove the chance of going broke.
To me, the big lesson was that you want a DRAWDOWN ANCHOR in a portfolio combined with EXPONENTIAL RETURNS (what I and Taleb call convexity). The drawdown anchor can be anything that you consider stable, it can be a combination of things (say 25% CHF T-Bills, 25% gold, 25% UST bonds, 25% other currencies) and the convexity can be anything that I think offers high potential returns at any given time (one year might be BTC, another it might be Brazilian stocks, in another it could be good old SPY).
So its a quite active approach, it can change from month to month, year to year. Although I probably devote less time to finding macro ideas now than I did in the past. Most of my work time is devoted to finding good day and swing trading stock ideas but I will take these convexity bets if I run into them
So this is the approach that I use now, leverage is sort embedded in these convexity bets because they tend to be high risk (like ICOs, or Galaxy Digital stock) but at the same time risk is limited by the $0 bound (I cant lose more than I put in). I wouldn't consider short positions as convexity bets even if I think they offer high return relative to risk, this is because they have just too much black swan risk. Also, in this approach that I use, I might go higher in terms of equity allocation than what is optimal (30%). I try to asses how safe it is to go higher and how much I would be willing to go higher based on the current enviroment, the economic cycle, etc. I think I was as high as 70% last year. I have cut down my exposure by a fair amount since then but I'm still above that 30%
I tend to prefer this second approach vs the first because its a lot more robust to black swans. Its a more antifragile approach, with the leverage approach, surprises tend to hurt you more than help. Maybe loading up in 10y/30y UST futures (the Dalio approach) is a great idea with less effort, maybe its just lunacy after a multi-decade bull market in bonds, I just dont know and I'm not comfortable doing that. Furthermore Dalio doesnt disclose how much he is levered right now, I wouldnt be surprised if its by less than people think
Thanks for the reply, this is great info and I will continue to digest it. I think in some ways I already intuitively considered anti-fragility—in the broad sense I’ve thought about how we all have different talents and resources and growth can be explosive if you aggressively lever them and especially lever against a backdrop of some sort.
Like having a portfolio that isn’t completely isolated but backed by a career/other assets—if I know I can divert income streams or even raise capital with soft terms when I need it most, then I can run more risk the other 90% of the time when things are behaving relatively normally and collect the premia for doing so.
At the end of the day, as you mention, it is hard to run leverage with unknowns present and a few causes for concern like coming off massive bond run. Which is why a feeling of confidence continues to elude me. I like the idea of being flexible with how much risk to have on, but then I think of all the evidence for how badly humans make objective judgements when left to their own devices from all the cognitive biases.
From what I’ve read having even a loosely defined systemic/algorithmic way of making decisions greatly improves results, even if it isn’t completely quantified. So I suppose I’m still trying to build a framework on how to make decisions like this. Appreciate you sharing some of the lessons you’ve learned so far.
Like having a portfolio that isn’t completely isolated but backed by a career/other assets—if I know I can divert income streams or even raise capital with soft terms when I need it most, then I can run more risk the other 90% of the time when things are behaving relatively normally and collect the premia for doing so.
At the end of the day, as you mention, it is hard to run leverage with unknowns present and a few causes for concern like coming off massive bond run. Which is why a feeling of confidence continues to elude me. I like the idea of being flexible with how much risk to have on, but then I think of all the evidence for how badly humans make objective judgements when left to their own devices from all the cognitive biases.
From what I’ve read having even a loosely defined systemic/algorithmic way of making decisions greatly improves results, even if it isn’t completely quantified. So I suppose I’m still trying to build a framework on how to make decisions like this. Appreciate you sharing some of the lessons you’ve learned so far.