Risk free strategy that yields 5.46% per annum.

globalarbtrader said:
Yes if you hold high dividend payers hedged with the index then you're effectively running something like an equity neutral hedge fund (though before embarking on this you probably need to do some more reading. At a minimum you should understand the difference between cash neutral and beta neutral). It isn't a 'free money machine' like your OP, but it should earn a positive return over time.

This is a reasonable thing to do*. But you're overpaying for your financing costs because interest margin is so much higher than what you get back in the futures hedge. So it's going to be tough to get positive carry without going for relatively high yielders (roughly speaking you need to earn at least 5.94% - LIBOR, or about 5.5% in dividends to break even).

* I do this myself, albeit without leverage.

GAT
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Where do you get 6% to breakeven from? The implied forward is 2%ish and you can fund at 1% pretty easily. Or are you thinking of UK indices?
 
newwurldmn said:
Where do you get 6% to breakeven from? The implied forward is 2%ish and you can fund at 1% pretty easily. Or are you thinking of UK indices?
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Sorry my mistake.

The OP stated that their cost of funding was 5.94%, but that includes the 4x leverage so it's actually about 1.5% (or 100bp over LIBOR). Assuming the future has a net hedging cost including implicit funding of 2.5% built in (based on your figures) implies the breakeven would be 4%. I find this a little high (might be the difference between looking at one quarterly roll to get the funding, which would be biased depending on when dividends come in and because of any interest rate forward changes); but you're certainly looking at a breakeven of at least 3.2% (S&P 500 yield of 2.2% plus the 100 bp spread the OP has to pay to borrow).

GAT
 
Chuck Krug said:
I know some guys who have run 100M with a somewhat similar strategy leveraged x5 and hedged wirh futures. And they averaged 13.2% p.a. (after their 2 and 20) since 2008
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Most probably your guys are running an equity neutral hedge fund, in which case they aren't perfectly hedged, and are buying stocks they expect to get a higher total return than the index. Like I said, that's a perfectly reasonable thing to do, but you're exposing yourself to a huge heap of correlation risk; and it's not a strategy that you should do without a lot more knowledge of what's going than you seem to have.

Else they're pulling your leg, since the perfect money machine in your OP doesn't exist.

(also as an institution they won't be paying 100bp over LIBOR to borrow, which makes it a lot easier)

GAT
 
Oh well
At least I got an interesting conversation going :)

BTW: I'm going to discuss this strategy (among others) with a fund next Wednesday. Any bootcamp-style cramming I should do beforehand?
Thanks.
 
Chuck Krug said:
Oh well
At least I got an interesting conversation going :)

BTW: I'm going to discuss this strategy (among others) with a fund next Wednesday. Any bootcamp-style cramming I should do beforehand?
Thanks.
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Personally, I wouldn't discuss this strategy at all. Anyone with a cursory understanding would realise that you don't know what you're talking about, and studying hard even for a week won't give you sufficient understanding.

I'm assuming that you know what you're doing with the other strategies, so bringing this into the mix just makes you look unneccesarily bad. If I was a potential investor, and I heard you talk about the stuff on this thread, I'd think 'who is this bozo' and throw you out of my office; regardless of how good your other ideas were.

(it's not so much that you don't know what you're talking about that would concern me, it's the fact that you didn't have the intuition to think 'this can't possibly work', and therefore I'd worry about how well you really knew everything else you were talking about)

GAT
 
Chuck Krug said:
Buy DIA yield 2.28%
Leverage x4
Total yield: 11,4%
-Margin interest 5.94% *

Yield: 5.46%

Hedge by shorting YM

* Interest on 400k example
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If you are confident for the 11.4% after paying 5.94%, with seed of 400K

Just calculate for 30 years.

1) After the first year, you make 400*0.114 =45.6K with paying of 400*0.0594 = 23.76K
2) At the first day of second year, you have a seed of 400+(45.6-23.76). How much is at the last day of second year?

******

3) How much you have after 30 years?
 
Capital + Margin / Dividend Yield / Cost (intrest +hedge)
1M 5% -2.00%
1M 5% -2.78%
1M 5% -2.78%
1M 5% -2.78%
1M 5% -2.78%
-----------------------------------------------------------------------------
25% -13.12%

Net profit: 11.88%
 
Chuck Krug said:
Capital + Margin / Dividend Yield / Cost (intrest +hedge)
1M 5% -2.00%
1M 5% -2.78%
1M 5% -2.78%
1M 5% -2.78%
1M 5% -2.78%
-----------------------------------------------------------------------------
25% -13.12%

Net profit: 11.88%
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do i understand this correctly, you have to go long the equities to collect the dividend, then to hedge you would go short the futures?? so you're going long the basis, cash-futures? but if cash > futures, and they converge at expiration, then you have to be short the cash, right? in which case you would not collect dividends, right? correct me please
 
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