So I've been considering using a significant amount of my portfolio towards implementing Hedgefundie's 55/45 strategy: https://www.bogleheads.org/forum/viewtopic.php?t=272007
Basically, it is a buy and hold strategy where 3x leveraged S&P 500 UPRO and 3x leveraged 20-year bonds TMF are held 55 to 45 percent, but if we use options to hedge, you could change this allocation to favor UPRO more than TMF (70/30, 75/25, or even 100 UPRO)
Right off the bat, there's a few concerns with this strategy. First, it is very volatile and depends on the SPY continuing to move steadily up. Many folks are speculating we're in a bubble that is bound to burst somewhat soon.
By far the biggest issue with this strategy is that a large drawdown in SPY could absolutely tank UPRO given that it is 3x leveraged. Last March, the fund went from ~$80 to ~$20 in just a couple of weeks, and only reached $80 again in January of this year.
The inherent hedge of this strategy is in TMF as bonds are often negatively correlated to equities. During the same crash last year, TMF shot up from ~$31 to ~$47, and stayed above $40 for a good portion of the year.
However, bonds increasing when the SPY decreases isn't a guarantee, so why wouldn't we hedge further with a some puts on UPRO and TMF ~10% OTM dated a year or so out? This is particularly compelling with Volatility at a low-point at the moment. Puts at this price range for this far out would cost quite a bit, roughly 10% of total investment, but would limit max loss in the event of a major downturn to cost of puts + how far OTM the puts are (20% total).
Should such a downturn occur, there's a couple things that could happen:
1) UPRO crashes, TMF goes up: in this case the gains from TMF will partially offset the losses in UPRO and you could exercise your put on UPRO and reinvest back in when the market starts to recover.
2) UPRO and TMF both crash: In this case you could exercise the puts and reinvest during the recovery. In the worst case scenario that the market doesn't recover (bear market) you would exercise your puts and realize a 20% loss from initial investment.
Given the potential returns of UPRO, it seems likely that it would be capable of generating some impressive returns, particularly if stock market is able to continue the bull-party for the rest of the year. Given the optimism around re-opening and the Fed's dovish monetary policy, this is a definite possibility. And if the market really does break? You could certainly do worse than 20% loss.
I'm sure I'm missing something about this, so before committing to this plan I was hoping to get some opinions.
Thanks!
Submitted April 08, 2021 at 07:26PM by 4th_and_schlong https://ift.tt/2Ox44Ls
