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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 achiev

by 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).
  - smabie 7y ago
    Volatility drag. Not trying to be a shill but I wrote a blog post about the mathematics of volatility drag if anyone is interested: https://smabie.github.io/posts/2019/10/04/vol.html https://smabie.github.io/posts/2019/10/04/vol.html It involves deriving “perfect” leverage ratios and talks about some other interesting (imho!) stuff.
  - slumdev 7y ago
    Yes, this is called "decay", and it's why you don't want to hold a leveraged fund over any long period.
    - smabie 7y ago
      According to my models there are very few market environments in which you would make less money with a leverage ratio of 2.5x. In order maximize return your leverage should be: Expected Return/Expected Variance For example even if the expected return is 1% and the vol 5%, the ideal leverage ratio for maximizing return is 4x! In short, a 2-3x leveraged ETF is an excellent investment and should outperform the index in almost all market conditions. It’s when your leverage ratio goes over 5x that you start to have major problems a lot of the time.
      - slumdev 7y ago
        I can appreciate this, but the fund decay actually has nothing to do with leverage. All "leveraged" ETFs (to the best of my knowledge) are synthetic - they achieve their "leverage" using derivatives, not by borrowing. These derivatives are not free, and like an option, can expire worthless. That's how the value in these ETFs evaporates over time, regardless of how the market performs.
        smabie 7y ago
        Of course not “regardless” of how the market performs, take a look at UPRO over the last 2/3 yrs. But those are in theory reasonable concerns, however empirically most leveraged funds have performed as promised relative to their benchmarks (with a couple notable exceptions I admit). The entire point of derivatives (as suggested in the name) is that they inherantly bear an underlying relationship to their underlying security. If you look at UPRO, its daily returns almost exactly track 3x of SPY. There’s no long-term “decay”, unless you are referring to volatility drag. VIX etfs are the notable exception, in that they do suffer from persistant negative carry.

by relham 7y ago

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).
- smabie 7y ago
  Volatility drag. Not trying to be a shill but I wrote a blog post about the mathematics of volatility drag if anyone is interested: https://smabie.github.io/posts/2019/10/04/vol.html https://smabie.github.io/posts/2019/10/04/vol.html It involves deriving “perfect” leverage ratios and talks about some other interesting (imho!) stuff.
- slumdev 7y ago
  Yes, this is called "decay", and it's why you don't want to hold a leveraged fund over any long period.
  - smabie 7y ago
    According to my models there are very few market environments in which you would make less money with a leverage ratio of 2.5x. In order maximize return your leverage should be: Expected Return/Expected Variance For example even if the expected return is 1% and the vol 5%, the ideal leverage ratio for maximizing return is 4x! In short, a 2-3x leveraged ETF is an excellent investment and should outperform the index in almost all market conditions. It’s when your leverage ratio goes over 5x that you start to have major problems a lot of the time.
    - slumdev 7y ago
      I can appreciate this, but the fund decay actually has nothing to do with leverage. All "leveraged" ETFs (to the best of my knowledge) are synthetic - they achieve their "leverage" using derivatives, not by borrowing. These derivatives are not free, and like an option, can expire worthless. That's how the value in these ETFs evaporates over time, regardless of how the market performs.
      - smabie 7y ago
        Of course not “regardless” of how the market performs, take a look at UPRO over the last 2/3 yrs. But those are in theory reasonable concerns, however empirically most leveraged funds have performed as promised relative to their benchmarks (with a couple notable exceptions I admit). The entire point of derivatives (as suggested in the name) is that they inherantly bear an underlying relationship to their underlying security. If you look at UPRO, its daily returns almost exactly track 3x of SPY. There’s no long-term “decay”, unless you are referring to volatility drag. VIX etfs are the notable exception, in that they do suffer from persistant negative carry.