What do you think of the UPRO/TMF Strategy that beats the S&P 500?

B

bizkitgto

[Lazy Trader's Take on UPRO/TMF](http://www.the-lazy-trader.com/2017...d-instruments-to-beat-the-markets-part-4.html)

[HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]](https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007)

I'm sure you guys have stumbled across this strategy before, the basic idea is holding a portfolio of: 40% UPRO (3X S&P500) and 60% TMF (3X LTT) rebalancing quarterly. This portfolio has held up extremely well (including the backtests). This portfolio has an annual return of 18% (backtested to 1987) compared to the S&P 500'S 9% return.

My concern is how will these leveraged ETFs hold up in a major drawdown like 2008 (will the fund be get shutdown)? Hedgefundie shows backtests to 1987, however these ETFs didn't exist until 2009, so there is a lot of assumptions built into his backtest. Also, what happens in a rising rate environment and/or stagflation?

What do you think guys? What is the black swan that kills this strategy?
 
bizkitgto said:
[Lazy Trader's Take on UPRO/TMF](http://www.the-lazy-trader.com/2017...d-instruments-to-beat-the-markets-part-4.html)

[HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]](https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007)

I'm sure you guys have stumbled across this strategy before, the basic idea is holding a portfolio of: 40% UPRO (3X S&P500) and 60% TMF (3X LTT) rebalancing quarterly. This portfolio has held up extremely well (including the backtests). This portfolio has an annual return of 18% (backtested to 1987) compared to the S&P 500'S 9% return.

My concern is how will these leveraged ETFs hold up in a major drawdown like 2008 (will the fund be get shutdown)? Hedgefundie shows backtests to 1987, however these ETFs didn't exist until 2009, so there is a lot of assumptions built into his backtest. Also, what happens in a rising rate environment and/or stagflation?

What do you think guys? What is the black swan that kills this strategy?
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NOT much risk @ all for rising rates,UPRO ; but like you noted on the UPRO, 2008 risk.I have to agree with K Fisher; bonds are too risky..TMF chart looks too risk also. NOT a prediction................................................................................
 
murray t turtle said:
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NOT much risk @ all for rising rates,UPRO ; but like you noted on the UPRO, 2008 risk.I have to agree with K Fisher; bonds are too risky..TMF chart looks too risk also. NOT a prediction................................................................................
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With the looming recession, I was considering: 25% UPRO / 25% ZIV/ 45% TMF/ 5% EDZ

Although, I have no way to back-test this. Any ideas how?
 
bizkitgto said:
[Lazy Trader's Take on UPRO/TMF](http://www.the-lazy-trader.com/2017...d-instruments-to-beat-the-markets-part-4.html)

[HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]](https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007)

I'm sure you guys have stumbled across this strategy before, the basic idea is holding a portfolio of: 40% UPRO (3X S&P500) and 60% TMF (3X LTT) rebalancing quarterly. This portfolio has held up extremely well (including the backtests). This portfolio has an annual return of 18% (backtested to 1987) compared to the S&P 500'S 9% return.

My concern is how will these leveraged ETFs hold up in a major drawdown like 2008 (will the fund be get shutdown)? Hedgefundie shows backtests to 1987, however these ETFs didn't exist until 2009, so there is a lot of assumptions built into his backtest. Also, what happens in a rising rate environment and/or stagflation?

What do you think guys? What is the black swan that kills this strategy?
More...
What's the Sharpe ratio? Any time someone focuses on absolute returns and fails to quantify risk adjusted returns you have to question their rigor and knowledge base as best. I think the quote "The main risk is that the S&P 500 and long Treasuries crash together in the same short period of time. In the past 30 years this has not happened, and I can't think of a real-world scenario in which this would happen." Do some research on LTCM, if you're not already familiar with it, ironically that prominently featured Myron Scholes of BS fame.
 
Sig said:
What's the Sharpe ratio? Any time someone focuses on absolute returns and fails to quantify risk adjusted returns you have to question their rigor and knowledge base as best. I think the quote "The main risk is that the S&P 500 and long Treasuries crash together in the same short period of time. In the past 30 years this has not happened, and I can't think of a real-world scenario in which this would happen." Do some research on LTCM, if you're not already familiar with it, ironically that prominently featured Myron Scholes of BS fame.
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Sharpe Ratio is 0.64 (backtest to 1987) with Sortino 1.01
 
bizkitgto said:
Sharpe Ratio is 0.64 (backtest to 1987) with Sortino 1.01
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Not exactly mind blowing given the straight S&P 500 has had a Sharpe of about 1 over the last 25 years. Sounds like it simply increases risk to increase returns, as one would expect with a leveraged product.
 
Sig said:
Not exactly mind blowing given the straight S&P 500 has had a Sharpe of about 1 over the last 25 years. Sounds like it simply increases risk to increase returns, as one would expect with a leveraged product.
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Did you back out the risk free rate? Most calculations I see have the SPY closer to 0.5 than 1 for that period. IIRC market can and has sustained ~1.0 for decade periods inbetween tail events but include a 1987/2000/2008 and the denominator jumps too much for returns to compensate.

@OP, clearly there are a few ways to make marginal improvements on 100% long stock. Diversification is probably the most well-publicized one. After that you need to start leaning on correlation risk and/or screening out high risk periods to get better numbers on paper. But thus increases the uncertainty that you're just running a fitted strategy.

I think people like the author are at least on the right track, escaping from the realm of market being 100% random/unpredictable. I'm puzzled by the prevalence and sentiment behind that dogma, but I suppose at the end of the day it means there's less money competing for more efficient positions. More power to them if they're comfortable being 100% risk on no matter what the circumstances are.
 
bizkitgto said:
The S&P 500 sharpe ratio has been 0.51 since 1987.
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And it's been about 1 over the last 25 years, which is what I stated no? Point being this strategy has an identified potential black swan event, per the OPs question and on a risk adjusted basis it's not terribly different than the S&P 500 depending on what time period you pick. Those are direct answers to the OPs questions.
 
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