5 ms·

You absolutely do not want to own upro for 5 years. High fees and more importantly beta-slippage will eat you alive.

smabie 6y ago
by beta slippage you mean volatility drag? On a risk adjusted basis, upro is definitely a loser due to volatility drag and high expense ratio. However, you can easily calculate optimal leverage ratio in order to maximize the geometric growth of your portfolio. The equation is: lev = E(r) / Var(r) So if the expected return is 10% and the expected volatility is 10%, optimal leverage to maximize geometric growth is 10x. This of course is much too high and the risk of losing everything due to excessive kurtosis and downside skew is very high. Like the everything else in finance, fundamental sin of that formula is assumption of the log normality of returns. 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. I wouldn't hold pure spy 3x and wouldn't exactly recommend it, but from a mathematical perspective it is a defensible (as in, you can make cogent arguments for it) long term investment. On the other hand, I would probably recommend 1.5x lev or possibly even 2x lev to certain people. As a quant, I approach these things like leverage from a mathematical perspective. It's important not to have an emotional reaction. There are very smart people running books that have 10x leverage but you would never be able to guess by looking at their volatility. It's all about the factor exposures, net delta, etc. For example I've seen 15x leveraged delta neutral books that have absolutely insane Sharpe ratios (>15) and annualized volatility of less than 5%.
- kgwgk 6y ago
  > 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.
eloff 6y ago
Well you would have done just amazing (as I pointed out) over the last 5 years. Better than 3x the S&P 500. I'm not saying you don't have a point, but one would need to look at how it performs over longer periods with more varied market conditions to answer your question.

by beta slippage you mean volatility drag? On a risk adjusted basis, upro is definitely a loser due to volatility drag and high expense ratio. However, you can easily calculate optimal leverage ratio in order to maximize the geometric growth of your portfolio. The equation is: lev = E(r) / Var(r) So if the expected return is 10% and the expected volatility is 10%, optimal leverage to maximize geometric growth is 10x. This of course is much too high and the risk of losing everything due to excessive kurtosis and downside skew is very high. Like the everything else in finance, fundamental sin of that formula is assumption of the log normality of returns. 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. I wouldn't hold pure spy 3x and wouldn't exactly recommend it, but from a mathematical perspective it is a defensible (as in, you can make cogent arguments for it) long term investment. On the other hand, I would probably recommend 1.5x lev or possibly even 2x lev to certain people. As a quant, I approach these things like leverage from a mathematical perspective. It's important not to have an emotional reaction. There are very smart people running books that have 10x leverage but you would never be able to guess by looking at their volatility. It's all about the factor exposures, net delta, etc. For example I've seen 15x leveraged delta neutral books that have absolutely insane Sharpe ratios (>15) and annualized volatility of less than 5%.

kgwgk 6y ago
> 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.

eloff 6y ago

Well you would have done just amazing (as I pointed out) over the last 5 years. Better than 3x the S&P 500. I'm not saying you don't have a point, but one would need to look at how it performs over longer periods with more varied market conditions to answer your question.