I did some backtesting simulations that made leveraged investing look pretty awesome. The effective borrow rate for funds like spxl is crazy low, way better than if I were to borrow myself. (Also, fwiw I was pretty conservative and am overall only around 2x-leveraged.)
The internet is very opposed to leveraged investing imo, but I think most of the concerns are pretty dumb. There was this one blog post where this guy ran ten simulations of his own, most of which showed the leveraged portfolio doing comparably to the baseline, but one a couple showed it doing worse and one saw the leveraged portfolio 100x'ing or something... and he concluded that it wasn't worth it??
People will also appeal to volatility drag as a superficially sophisticated knockdown (in short, imagine all four two-step paths in which the market goes up or down by 10% at each step. Then the baseline market averages out to (.81 + .99 + .99 + 1.21)/4 = 1, and a 3x leveraged portfolio averages out to (.49 + .91 + .91 + 1.69)/4 = 1. Volatility drag is those two middle worlds where the leveraged portfolio does badly despite the market as a whole basically ending up where it started.
> I do not understand how leverage will be beneficial.
Same here, if I understood the grandparent they were saying you lose 0.04% on every trade (from spread) and "in a year" that is 10% (250 trades?).
If you have a strategy that has expected returns of x bips per trade then you make an expected x-4 and with leverage 4 * (x - 4). Both have the same "sign", so if x-4 is expected positive, leverage just makes it higher risk-reward.
In fact with leverage you also have to pay interest on the loan, which seems to be at least ~18 bips (or 3/4 of that since the returns are on 4 * cash and interest is on 3 * cash) for a single day loan (far exceeding the "spread cost"):
https://www.schwab.com/public/schwab/investing/accounts_prod...
It seems the only way leverage would help is if there were fixed costs to trading (which I assume there are but the GP does not mention).
> put all your money into leveraged! assets (stocks, housing),
Spoken like someone who has only operated in the recent bull market.
Using a mortgage to buy a reasonable house that you can afford is a good idea.
Using leverage to buy as much real estate and/or stocks as you can get away with is a terrible idea with some significant downside risk. Leveraged stock purchases are notorious for working great until the market turns and blows up your account. Even leveraged funds have significant slippage that isn’t obvious to the casual investor who thinks they’re just going to get a clean 2X return.
One of my most poignant memories from the 2008 crash was watching a few people I knew go from feeling like they were financial geniuses to bankrupt and struggling. The common theme among all of them was that they were leveraged to the hilt in real estate. They thought it was easy money when it felt like the market could only go up. Then it stopped going up and we all know what happened next.
>Are you saying despite having higher returns, the higher risk makes this strategy worse? That really feels like handwaving to me, since the only thing I care about is ROI.
There’s lots of metrics that try to balance the risk and reward. Often, the risk is based on the volatility of the asset. The common alpha metric does this by incorporating the assets volatility compared to the overall market volatility. There’s others like Sharpe ratio etc.
Factoring that volatility is particularly important in long-term investing so your choices don’t, as you say, tank your investment. So maybe you interested in cyclicals over the last nine months and your investments went gangbusters. Does that mean that same strategy will work in perpetuity? Probably not, because cyclicals tend to have high volatility. Risk -adjusted metrics attempt to quantify that risk.
>For example, if we purchased a 2x bull leveraged S&P 500 ETF such as SSO, we would choose an appropriate weight to cancel out the leverage, 0.5 in this case. If we kept the rest of the money in cash, the return of the portfolio would only be slightly worse than that of the S&P 500, due to the 0.90% expense ratio we pay.
A 2x bull leveraged etf replicates daily moves. your long term return to expense expectations are completely off.
> I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways.
Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
> However, is 3x too high for the long term? I dunno, but over long time periods, a pure 3x leveraged spy portfolio is going to outperform significantly. The problem is most people will be unable to weather the storm as you can easily lose half of your money in a week.
You don't define "long time periods" but the storm may be much longer than one week.
If you had invested with 3x leverage (daily rebalanced) in the S&P 500 anytime in 1999 or 2000 you would have been down over 90% in 2009 and you wouldn't have broken even until 2014 or 2016.
> Back in 2015 I put some of my money into wealthfront, despite the market doing well at the time, my wealthfont fund which was heavily stock balanced did somewhat poorly. This was over a year's time so not short lived by any means. I pulled my money out and invested into stocks I chose and never looked back(typically get 10-15% returns a year).
exact same sequence. I was surprised how poorly it underperformed.
>Oh, and don't get me started on naked futures/forward positions...
Some of the people that purchase these are plenty happy during a crash. What is it about time-based derivatives that you have a problem with in particular?
> Folks smarter than me: is it prudent to move my assets into cash for a couple of months?
No, bad idea. Don't make moves based on press articles like this -- they're either created by people who want to exploit your reaction, or they're followed by contrarians with no connection to the article, who do the opposite of what the article suggests, and thereby also exploit your reaction.
The analogy I was going for was this person took what sounds like his entire savings and then took loaned money against his house and put it all into trading super high variance options.
I'm not an experienced trader but I occasionally talk to some. They all say options trading like that is a massive gamble. There's a big difference between long term investing into an ETF and doing what this person did.
He could have chosen to put $500 into his account and hand picked some stocks or ETFs and then watched it grow or shrink over time as he learns how to trade but instead he chose to use 15k+ and then 2 big loans on high variance moves to either hit it big or go bust in a very short time frame. It just happened in this case he busted.
I think he would have had the same outcome on another platform if Robinhood didn't exist.
> I'm skeptical for two reasons. (1) because your methods are so unconventional in an industry where convention rules, and (2) because of the time frame of your success,
I was also in this business, and there's nothing unconventional about his methods. It would, in fact, closely describe the methods of more than one shop I'm familiar with. (Except they WERE able to overcome the declines). And the 3-6 month indicator lifetime looks eerily familiar.
And these places are anything but "convention rules" - it's "creativity rules, before our competitors get creative enough".
> When someone shows me strategies that worked in 2009 and 2010, I immediately make them prove their strategy was not the equivalent of being long equities.
Assuming the OP is telling the truth, there is no equivalent "long equities" strategy that would make 1500% profit over 6 months (%3000 annualized), with a max drawdown of 20% ($2000 on $10000 - but his max drawdown was probably closer to 5% than to 20%). You are welcome to demonstrate that there is.
Sounds to me like you are doing low frequency strategies; it's a completely different ballgame than HFT. He's done 400,000 trades, half of them long, half of them short. It might have been luck, and he might have been riding something underlying the equities, but this is NOT equivalent to being long equities. He might have found a way to get non-linear leverage (rather than prediction). But that's also worth a lot of money in the right hands.
> buy 10 RUT futures at the beginning of the day, sell 10 at the end, and just scratch 1 lots for the other 998 trades. In a bull market like 09-10, that would have made 400k, and would have nothing to do with Machine Learning or its applications to HFT.
That may be (I wasn't trading in 2009-2010, and don't remember the movements or the required margins), but that would have had much higher volatility (and days with much more than $2000 loss) than the OP had. (Assuming, of course, he is telling the truth)
I did some backtesting simulations that made leveraged investing look pretty awesome. The effective borrow rate for funds like spxl is crazy low, way better than if I were to borrow myself. (Also, fwiw I was pretty conservative and am overall only around 2x-leveraged.)
The internet is very opposed to leveraged investing imo, but I think most of the concerns are pretty dumb. There was this one blog post where this guy ran ten simulations of his own, most of which showed the leveraged portfolio doing comparably to the baseline, but one a couple showed it doing worse and one saw the leveraged portfolio 100x'ing or something... and he concluded that it wasn't worth it??
People will also appeal to volatility drag as a superficially sophisticated knockdown (in short, imagine all four two-step paths in which the market goes up or down by 10% at each step. Then the baseline market averages out to (.81 + .99 + .99 + 1.21)/4 = 1, and a 3x leveraged portfolio averages out to (.49 + .91 + .91 + 1.69)/4 = 1. Volatility drag is those two middle worlds where the leveraged portfolio does badly despite the market as a whole basically ending up where it started.
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