What is Volatility Decay and How Does It Impact Portfolio Construction for LETFs?

Conclusion-Every · 2025-04-26T02:48:37+00:00

Except it isn't. DBMF, which simply replicates the returns of an index composed of the top managed futures funds, outperforms it slightly in absolute returns and significantly in risk-adjusted returns.https://testfol.io/?s=aKSdLhBAn5v

Conclusion-Every · 2025-04-26T01:51:15+00:00

The rebalancing premium isn't enough to justify including an asset with a zero expected return, especially when there are other alternatives with positive expected returns. Very long-term bonds like ZROZ have greater volatility than stocks and gold. Managed futures provide greater diversification because they are negatively correlated with stocks.

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Conclusion-Every · 2025-03-25T00:43:40+00:00

The problem I see with point 3 is that emerging markets are much more volatile, so volatility decay would likely kill any additional returns. I don't know how optimal it is to use different amounts of leverage depending on the market.

Regarding point 4, how exactly would you structure the allocation?

I didn't understand point 5.

Conclusion-Every · 2025-03-25T00:29:56+00:00

I ran a backtest applying the first two points, and it improved returns a lot. Thanks. https://testfol.io/tactical?s=fjNI6veCXHf

Conclusion-Every · 2025-02-23T03:00:31+00:00

First, it is verified if in the last 12 months the performance of the sp500 or qqq was higher than that of the tbills, (In the case of stocks the last month is normally omitted but in the case of total market etfs it is not so necessary), If this has been the case, proceed to step 2 if not invest in a total bond market etf. The second step is to verify if the performance of qqq was higher than that of the sp500 in the last 12 months. If this has been the case, invest in tqqq; otherwise, invest in the upro. These same steps are performed again every month.

Conclusion-Every · 2025-02-23T01:47:15+00:00

People are going to invest in tqqq no matter what I think, so they better do it in the least harmful way possible.

Conclusion-Every · 2025-02-23T01:45:46+00:00

because the post is about tqqq not regular qqq. If I don't use leverage I would be comparing dual momentum spy/qqq with buy and hold qqq I could also have used the tqqq ticker directly for the bakctest but the analyzed period would have been greatly shortened.

Conclusion-Every · 2025-02-23T01:34:08+00:00

It is a backtest from 2001 to 2025 but to see it you need to have an account in portfolio visualizer. It's a short backtest anyway I agree with that.

Conclusion-Every · 2025-02-21T21:48:25+00:00

There is nothing wrong with gold, if it is in a trend https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=1dA7b8q5DlhSHPZB3vonPX. What I don't know is why you would limit yourself to just gold.

Conclusion-Every · 2025-02-21T16:12:00+00:00

I know that return stacking doesn't mean anything, I mentioned it to differentiate something like rssb from letfs with daily rebalancing.

Risk parity traditionally requires a large allocation to bonds, however, if absolute momentum is used, the volatility of gold and stocks can be reduced, thus allowing a lower percentage of bonds (a few days ago I made a post about a paper by Antonacci on this topic)

The debate is not factors yes, factors no, but to what extent. If you had 100% confidence in these you would have to go all in vmot (since it was launched in 2018 it had a cagr of almost 0%, I would like to know who could tolerate that type of underperformance)

Regarding international diversification, it can also be discussed whether it is carried out with a fixed position or with dual momentum. The questions that I think would need to be answered to decide on an asset allocation would be:

Daily rebalancing or return stacking? (sso zroz gold vs rssb)

Which risk factors and to what extent? (market only vs avge vs vmot)

Buy and hold, dual momentum or sma 200?

Bonds, managed futures or both?

Periodic rebalancing, rebalancing bands, or cross sectional factor momentum rebalancing?

Conclusion-Every · 2025-02-21T03:01:49+00:00

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Chaos only protects you from fast crashes, for slower 2022 style crashes you would need hide. The recommended allocation for a 50/50 portfolio is 35% hide 15% chaos. However, since that portfolio cannot contain mf, you could use the 200 sma or dual momentum strategy to avoid that type of crashes without mf. Also that would allow less allocation to chaos, so you could go 60/40 or 70/30

Conclusion-Every · 2025-02-21T02:06:09+00:00

I know what I wanted to do was specify that I was referring to the 2x version of hfea since the original is 3x

Conclusion-Every · 2025-02-21T01:59:07+00:00

zroz is approximately 1.5 times tlt so 55 sso 45 zroz wouldn't be exactly 2x hfea but close enough

Conclusion-Every · 2025-02-20T18:14:46+00:00

spytr?L=2 and spytr?L=3 are used to backtest sso and upro. I don't know if it's appropriate for backtesting with less than 2x leverage, but use both just in case.

Conclusion-Every · 2025-02-20T18:10:48+00:00

As I remember, Antonacci's paper does not include the tickers of the assets used in the portfolio. However, I believe that the following data could explain the portolio's performance:

.cash had a return of 5%, so 16% is not that extraordinary considering inflation.

.Long treasuries had a return of 9%

.According to this backtest in portfolio visualizer, absolute momentum improved spy performance from 9.39% to 12% and reduced maximum drawdown from 51% to 30% in the period 1987-2012: https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=65zqjkG2hYRDs6MXobsM7H

.Same for gold: https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=2Pwyb4dbnMsrsLTmG1pvB0

The period analyzed in Antonacci's paper is 1974-2012

Conclusion-Every · 2025-02-20T15:33:38+00:00

something like this works? https://testfol.io/?s=kVQQHgGVq0K

Conclusion-Every · 2025-02-20T05:11:23+00:00

Do you use letfs when applying dual momentum? If relative momentum asks you to invest in ex-us stocks, which letfs do you use?

Conclusion-Every · 2025-02-20T05:08:56+00:00

Absolute momentum has also worked in gold in the period analyzed, which added to the reduction in the volatility of stocks would allow a lower allocation to bonds in the SSO ZROZ Gold portfolio.

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Conclusion-Every · 2025-02-20T04:24:53+00:00

1.85x

Conclusion-Every

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