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The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY con

by eaenki 7y ago

The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the last decade it returned less than 70% YoY.

scottious 7y ago
If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?
- eaenki 7y ago
  You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too. If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008. Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.
  - scottious 7y ago
    Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise. Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.
    - smabie 7y ago
      RenTec does use a lot of leverage, but they only can do it because there Sharpe ratio ((return-riskfree)/volatility) is over 7x. This means that if there fund had a unlevered return of 3.5% then their vol would be 0.5%. Let’s say their risk limit is to cap vol at 10%, this means that their theoretical return would be 70%. It doesn’t exactly work like this because of volatility drag. If you’re interested check out my blog post on the topic: https://smabie.github.io/posts/2019/10/04/vol.html https://smabie.github.io/posts/2019/10/04/vol.html
relham 7y ago
3x levered nasdaq 100 would give you an annual volatility of at least 30-50%, occasionally much much higher. The crazy thing is that medallion presumably achieved this with a very small volatility and no significant drawdowns. Nasdaq 100 was down -42% in 2008, so levered 3x you would be out of business.
- eaenki 7y ago
  Of course. It’s not an apple to Apple comparison, it’s just to point out those returns are possible. Also, would you rather have invested your salary from 2003 to 2020 not leveraged or always leveraged x3, bust in 2008, and then cash out today? Probably the latter. And that’s pretty consistent. After a recession, you usually have a decade of growth. So not exactly hard to do either.
  - leetcrew 7y ago
    sure, if I get to assume I'll have a steady salary indefinitely, I would prefer the 3x leverage. in reality, the stability of your job is correlated with the market. if I chose the leverage scenario, my portfolio would be valueless at the exact moment that I was most likely to lose my cashflow. without leverage, I would have taken a big hit, but still have had some money to draw on.
- smabie 7y ago
  3x leverage ETFs rebalance daily, so you would still have some money since the biggest single day loss of Nasdaq is ~10%.
  - tomatocracy 7y ago
    Incidentally this also means that if you buy the etf on day 1 and the underlying is at 100, on day 2 the underlying falls to 99 then on day 3 goes back to 100 then you would be left with less than 100% of what you started with (assuming perfect tracking and no fees).
    - 7y ago
fnord123 7y ago
>The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And from 2000 to 2010, it was down 23%. >there’s no reason why with $10B trading all asset classes one can’t return 70% YoY There are plenty of reasons. First, if you have a small amount of money, it remains liquid. This is why HFT firms can have Sharpes around 8 - they can move the money fast because they are smaller firms. If you have 10B USD you cannot respond to the market. You have to trade slowly and choose your positions to last a while. This leaves you with a Sharpe of around 1 if you're optimistic. Otherwise in your fantasy, you could turn 10B into 1T in 8 years. Another reason is that as your portfolio scales, it becomes harder and harder to find uncorrelated returns.

by eaenki 7y ago

scottious 7y ago

If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?

eaenki 7y ago
You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too. If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008. Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.
- scottious 7y ago
  Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise. Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.
  - smabie 7y ago
    RenTec does use a lot of leverage, but they only can do it because there Sharpe ratio ((return-riskfree)/volatility) is over 7x. This means that if there fund had a unlevered return of 3.5% then their vol would be 0.5%. Let’s say their risk limit is to cap vol at 10%, this means that their theoretical return would be 70%. It doesn’t exactly work like this because of volatility drag. If you’re interested check out my blog post on the topic: https://smabie.github.io/posts/2019/10/04/vol.html https://smabie.github.io/posts/2019/10/04/vol.html

relham 7y ago

3x levered nasdaq 100 would give you an annual volatility of at least 30-50%, occasionally much much higher. The crazy thing is that medallion presumably achieved this with a very small volatility and no significant drawdowns. Nasdaq 100 was down -42% in 2008, so levered 3x you would be out of business.

eaenki 7y ago
Of course. It’s not an apple to Apple comparison, it’s just to point out those returns are possible. Also, would you rather have invested your salary from 2003 to 2020 not leveraged or always leveraged x3, bust in 2008, and then cash out today? Probably the latter. And that’s pretty consistent. After a recession, you usually have a decade of growth. So not exactly hard to do either.
- leetcrew 7y ago
  sure, if I get to assume I'll have a steady salary indefinitely, I would prefer the 3x leverage. in reality, the stability of your job is correlated with the market. if I chose the leverage scenario, my portfolio would be valueless at the exact moment that I was most likely to lose my cashflow. without leverage, I would have taken a big hit, but still have had some money to draw on.
smabie 7y ago
3x leverage ETFs rebalance daily, so you would still have some money since the biggest single day loss of Nasdaq is ~10%.
- tomatocracy 7y ago
  Incidentally this also means that if you buy the etf on day 1 and the underlying is at 100, on day 2 the underlying falls to 99 then on day 3 goes back to 100 then you would be left with less than 100% of what you started with (assuming perfect tracking and no fees).
  - 7y ago

fnord123 7y ago

>The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And from 2000 to 2010, it was down 23%. >there’s no reason why with $10B trading all asset classes one can’t return 70% YoY There are plenty of reasons. First, if you have a small amount of money, it remains liquid. This is why HFT firms can have Sharpes around 8 - they can move the money fast because they are smaller firms. If you have 10B USD you cannot respond to the market. You have to trade slowly and choose your positions to last a while. This leaves you with a Sharpe of around 1 if you're optimistic. Otherwise in your fantasy, you could turn 10B into 1T in 8 years. Another reason is that as your portfolio scales, it becomes harder and harder to find uncorrelated returns.