If we’d short the second against the first, essentially, it’d mean we have a 15% exposure to TLT, and a -15% exposure to VXX. The second strategy seems to be strictly worse than the first. Again, let’s compare synthetic to actual. In this instance, it’s highly similar–50% SPXL (3x SPY), 40% TMF (3x TLT), and 10% TVIX (2x VXX). Just that my own personal benchmark is an annualized return over max drawdown of 1 or more (meaning that even the worst streak can be made up for within a year’s time–or, more practically, that generally, you don’t go a year without getting paid). That stated, the original strategy handily trounced the SPY benchmark, and the difference trounced the leveraged TLT. Generally, anytime I see an article claiming “this strategy does really well against benchmark XYZ”, my immediate intuition is: “so what does the equity curve look like when you short your benchmark against your strategy?” If the performance deteriorates, that once again means some tough questions need asking. In short, for a strategy that markets itself on beating the SPY, shorting the SPY against it costs more in upside than is gained on the downside. diff Return.annualized(diffAndModTLT)Īnnualized Sharpe Ratio (Rf=0%) 0.4889822 0.3278975 Now, the claim is that this strategy consistently beats the S&P 500 year after year? That can also be tested. discrepancy Return.annualized(stratAndSPY)Īnnualized Sharpe Ratio (Rf=0%) 0.9487574 0.3981902Īn annualized Sharpe just shy of 1, using adjusted data, with a CAGR/max drawdown ratio of less than one half, and a max drawdown far beyond the levels of acceptable (even 20% may be too much for some people, though I’d argue it’s acceptable over a long enough time frame provided it’s part of a diversified portfolio of other such uncorrelated strategies). the actual TMF (so if you can borrow for less than 3% a year, this may be a good strategy for you–though I’m completely in the dark about why this sort of mechanic exists–is it impossible to actually short TMF, or buy TLT on margin? If someone is more intimately familiar with this trade, let me know), so, I’m going to make like an engineer and apply a little patch to remove the bias–subtract the daily returns of the discrepancy from the leveraged adjusted TLT. SpxlRets Return.annualized(tmf3TLT-tmf3TLT)Ī bit more irritating, as there’s clearly a bit of discrepancy to the tune of approximately 3.1% a year in terms of annualized returns in favor of the leveraged TLT vs. This post aims to address this for three separate configurations of the strategy.įirst off, in order to create a believable backtest, the goal is to first create substitutes to the short-dated newfangled ETFs (SPXL and TMF), which will be done very simply: leverage the adjusted returns of SPY and TLT, respectively (I had to use adjusted due to the split in SPXL–normally I don’t like using adjusted data for anything, but splits sort of necessitate this evil). If offered a 50% coin flip, with the outcome of heads winning a million dollars and being told nothing else, the obvious question to ask would be: “and what happens on tails?” The question, obviously, is what happens when the market doesn’t support the strategy. From a conceptual standpoint, it’s quite trivial to realize that upon reading the articles, that when a large chunk of the portfolio consists of a leveraged SPY exposure, one is obviously going to look like a genius outperforming the SPY itself in a bull run. In any case, here is the link to the two articles:Ī Weird All-Long Strategy That Beats the S&P 500 Every YearĪs usual, the challenge is that the exact ETFs in question didn’t exist prior to the financial crisis, giving a very handy justification as to why not to show the downsides of the strategy/strategies. Helmuth Vollmeier for his generosity in providing long-dated VXX and ZIV data, both of which will be leveraged for this post (in more ways than one). Again, before anything else, a special thanks to Mr. So Harry Long recently posted several articles, a couple of them all that have variations on a theme of a combination of leveraging SPY (aka SPXL), leveraging TLT (aka TMF), and some small exposure to the insanely volatile volatility indices (VXX, TVIX, ZIV, etc.), which can have absolutely insane drawdowns.
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