Here we dive into the famous “Excellent Adventure” from Hedgefundie and how to implement it on M1 Finance.
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In a hurry? Here are the highlights:
- Hedgefundie is a member of the Bogleheads forum.
- Hedgefundie created a thread in February 2019 proposing a 3x leveraged ETF investing strategy based on risk parity using the S&P 500 index (UPRO) and long-term treasury bonds (TMF) held in a 40/60 allocation.
- Hedgefundie later updated the strategy’s asset allocation in August 2019 to 55/45 UPRO/TMF.
- Extensive backtesting, discussion, and analysis within the thread by members of the Bogleheads forum supports the validity and potential market outperformance of the strategy.
- The proposed strategy calls for quarterly rebalancing.
- Several different protocols/variations of the strategy emerged in the Excellent Adventure thread, including monthly rebalancing, rebalancing bands, and volatility targeting with various lookback periods.
- Some users have added a dash of TQQQ (3x the NASDAQ 100 index) for a minor tech tilt, as Big Tech has had a stellar run recently.
- It is recommended to implement the strategy within a Roth IRA on M1 Finance, to avoid tax implications and to make regular rebalancing seamless and easy.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
Contents
Who is Hedgefundie?
Hedgefundie is a member of the Bogleheads forum who created a now-famous thread on the forum proposing a 3x leveraged ETF strategy.
What is the Hedgefundie Strategy?
The Hedgefundie strategy – the wild ride of which has become known as “Hedgefundie’s Excellent Adventure” – is based on a risk parity allocation of leveraged stocks (3x the S&P 500 index via UPRO) and leveraged long-term treasury bonds (3x the ICE U.S. Treasury 20+ Year Bond Index via TMF).
Risk parity is a portfolio allocation strategy in which, consistent with Modern Portfolio Theory (MPT), risk is spread evenly among assets within the portfolio by looking at the volatility contributed by each asset, thereby attempting to optimize returns per unit of risk (Sharpe).
The Hedgefundie strategy relies heavily on the negative correlation (or at least, uncorrelation) between stocks and long-term treasury bonds, wherein the bonds provide a buffer during stock drawdowns. Long-term treasuries are chosen precisely because they are more volatile than shorter-duration bonds and because of their degree of negative correlation to stocks, in order to sufficiently counteract the downward movement of a 3x leveraged stocks position. This concept is based on the simple historical principle of improving risk-adjusted return (Sharpe) over long periods by holding uncorrelated assets, such as a traditional 60/40 stocks/bonds portfolio, as opposed to 100% stocks.
Consistent with the idea of Lifecycle Investing, this heavily-leveraged strategy is better suited for young investors with a long time horizon who can afford to be risky early in their investment horizon. Hedgefundie advocates for treating this strategy like a “lottery ticket” and not using it with a significant portion of your total portfolio value.
Critics and naysayers reflexively exclaim the oft-cited, overblown, platitudinous “Leveraged ETF’s aren’t meant to be held long-term because of volatility decay,” but, in short, that doesn’t concern me. Moreover, that same volatility decay can actually help when upward movement with positive momentum is occurring. I would also argue that as long as you can stomach the volatility, a major drop should [eventually] be followed by a major rebound; 3x hurts on the way down but helps on the way up. UPRO from ProShares and TMF from Direxion were chosen due to their low tracking error and high volume; again, we’re getting 300% exposure to the S&P 500 and long-term treasury bonds, respectively.
The proposed strategy calls for quarterly rebalancing. Several different protocols/variations of the strategy emerged as the Excellent Adventure thread progressed, including monthly rebalancing, rebalancing using bands, and volatility targeting with various lookback periods. It is recommended to implement the strategy within a Roth IRA on M1 Finance, to avoid tax implications and to make regular rebalancing seamless and easy.
Utilizing a traditional, unleveraged 40/60 stocks/bonds portfolio, compared to an all-equities portfolio, has relatively low volatility and should produce higher risk-adjusted return (Sharpe) over long time periods, but would also likely underperform an all-equities portfolio in terms of total return. The solution, Hedgefundie maintains, is applying leverage. We’re attempting to accept a risk profile similar to that of the S&P 500, but with much higher returns.
Hedgefundie updated the approach 6 months after posting the original strategy, opting to move to a 55/45 UPRO/TMF allocation from the previous 40/60 risk parity allocation. Hedgefundie’s reasons are laid out here, based primarily on the premise that the stocks portion of the strategy is the primary driver of the strategy’s returns and that the main purpose of holding the treasury bonds is essentially as “insurance” in case of a stock market crash.
Intrinsically, we’re relying on US stocks and long-term treasuries not crashing in tandem. At the time of writing, these assets have a seemingly reliably negative correlation close to -0.5. A key fundamental assumption of this strategy that Hedgefundie proposes is that the US will not return to pre-Volcker (pre-1982) monetary policy. That is, we’ll be able to significantly mitigate or altogether avoid hyperinflationary periods like the late 1970’s, during which time bonds suffered greatly.
Stocks and long-term treasury bonds do not have a perfect -1 correlation. Sometimes they move in the same direction. This is actually a good thing. Historically, when these assets moved in the same direction, it was usually up. On days when stocks dropped, long-term treasuries fairly reliably rose significantly to mitigate the total loss.
Simulated returns going back to 1987 look like this:
Here are the rolling returns:
Below are the drawdowns. Notice the smaller drawdowns in most cases compared to the S&P 500:
I agree with Hedgefundie’s assertion that extremely volatile assets like gold, commodities, small caps, etc. would suffer worse from volatility decay and would not improve the strategy’s diversification and return. International developed markets may be a viable option to include, but Boglehead member siamond found issues with the DZK ETF.
Some users have added a dash of TQQQ (3x the NASDAQ 100 index) for a minor tech tilt, as Big Tech has had a stellar run recently.
Make no mistake that this is a risky strategy by its very nature. Read up on leverage and the nature of leveraged ETF’s before employing this strategy. Do not put your entire portfolio in this strategy.
Read more details and nuances of the strategy on the original thread here. If you’ve got the time, there’s a lot of learning to be had throughout the entire thread. The thread has expanded into a Part II here.
My Hedgefundie Adventure Performance
Tracking the change in the initial value of my Hedgefundie Adventure in my own portfolio:
07/01/2020: +86%
10/01/2020: +41%
01/01/2021: +39%
Alternative Options to the Hedgefundie Portfolio
If you want to utilize a leveraged strategy similar to that proposed by Hedgefundie but be completely hands off, PIMCO has been doing something similar for years with their StocksPLUS Long Duration Fund (PSLDX) since 2007. Read more about the fund here. Note that you can only access this fund through certain brokers, and it may have a minimum investment requirement. Those details are beyond the scope of this post; ask your broker if it’s available to you.
Similarly, if you’re doing this with a small portion of your portfolio or if you want to employ a leveraged strategy in a taxable account, WisdomTree’s NTSX may be a suitable option, effectively providing 1.5x leverage on a traditional 60/40 stocks/bonds portfolio. It holds 90% straight S&P 500 stocks and 10% treasury futures to achieve effective exposure of 90/60 stocks/bonds. Read more about the fund here.
Bogleheads user MotoTrojan proposed a variant by which you can match the volatility of Hedgefundie’s 55/45 UPRO/TMF and save some on the expense ratio of TMF by utilizing Vanguard’s Extended Duration Treasury ETF (EDV) in a ratio of 43/57 UPRO/EDV. Here’s an M1 pie for that.
A leveraged All Weather Portfolio may also appeal to you.
The Hedgefundie Portfolio ETF Pie for M1 Finance (UPRO/TMF)
Again, most users are utilizing M1 Finance to deploy the Hedgefundie strategy due to its dynamic rebalancing with new deposits, zero transaction fees, and its simple, 1-click rebalance that you can do quarterly. It takes no more than 30 seconds every 3 months. I wrote a comprehensive review of M1 Finance here.
The risk parity 40/60 portfolio would be this pie which looks like this:
- 40% UPRO
- 60% TMF
To add this pie to your portfolio on M1 Finance, just click this link and then click “Save to my account.”
The updated 55/45 portfolio would be this pie which looks like this:
- 55% UPRO
- 45% TMF
To add this pie to your portfolio on M1 Finance, just click this link and then click “Save to my account.”
M1 Finance is actually currently offering a transfer bonus promotion through February 28, 2021 for up to $3,500 when transferring an existing account from another brokerage, as outlined below:
Disclosures: I am long PSLDX, NTSX, UPRO, and TMF.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
I studied your leveraged porfolios AWP and HFEA. They are all impressive. Somehow I saw this article that against leveraged porfolios. To be honest the inforamtion in the article is a bit beyond me so I would like to know what is your opinion about this? Thanks.
https://www.mindfullyinvesting.com/why-not-use-leverage-another-tug-on-the-lever/
Hey Josh, thanks for the kind words.
As the article notes, most of the points brought up have been discussed ad nauseam in the original thread on the Bogleheads forum. It basically comes down to one’s view of U.S. monetary policy. The article is more agnostic toward interest rate environments. If you believe interest rates will – or even have the ability to – rise rapidly for an extended period, then long term treasuries – and subsequently this strategy – may not be the best idea. If, however, you believe that the Fed now knows which levers to pull to avoid what we saw in the late 1970’s before Volcker, then I think the situation is not as dire as that article makes it out to be. In any case, obviously we don’t know the future, and past results are not necessarily indicative of future results. Moreover, Hedgefundie always reminded people not to put one’s entire portfolio in this strategy, but rather treat a small piece as a “lottery ticket.”
Thanks John. The explanation is clear to understand. But then I come up with another question.
If we look into 3x AWP its 55% LTT and 30% UPRO. I know we have another 15% for as a cusion compared to HFEA.
We know we shouldnt all-in to HFEA (As you mentioned he suggests only 10%-15% of capital). Base on the similarity of HFEA and 3x AWP. Is it ok to all-in or monthly invest to 3x awp?
Thanks alot.
As with all things, it largely comes down to personal time horizon and risk tolerance. I personally wouldn’t go all in on any of these leveraged strategies. Also depends on what overall leverage ratio you’re aiming for in your portfolio; 50% “normal” unleveraged and 50% 3x results in a total leverage ratio of 2. All things being equal, greater leverage is more suitable for young investors with a long time horizon and high tolerance for risk, whereas an investor at retirement probably shouldn’t be levered up at all.
Hi John:
Great job summarizing the strategy. Could you comment on how the bond portion of the portfolio can help offset the stock portion when long bond prices at at record lows. I just can’t seem to wrap my head around a situation where the bond portion will rise any time in the near term. I guess interest rates could go down slightly but there just doesn’t seem to be any room in this environment. Thank you!
Bond convexity. Moreover, remember that just because interest rates are low does not mean they will rise. They have gradually declined for the last 700 years. Bonds remain the best diversifier alongside stocks because they are currently still the asset with the lowest correlation to stocks. Lastly, the bond portion of this strategy is essentially insurance; we don’t really care as much about its performance in isolation.
I think the likelihood of rates rising in the near (year or two from now) term is bothering me too, although I am planning to try out this portfolio. Its interesting that rates have declined over 700 years. However, now that we are at zero, there is nowhere else to go, it seems. I guess they could go negative… What were previous time periods when rates rising and how did this portfolio perform during that time?
Thanks.
Thank you John for the info and your great site. I have a question regarding holding a leveraged ETF position inside a taxable account. Are there any different tax consequences of these leveraged ETFs compared to unleveraged ETFs that I should pay attention to?
Thanks for the kind words, Justyn! To answer your question, yes, definitely. The daily resetting of these funds makes them unsuitable for a taxable environment if you can avoid it. We would hope the enhanced returns would make up for the tax consequences over the long term, but the taxes will definitely eat into your returns. Utilizing NTSX and/or margin would be a much more tax-efficient approach (compared to leveraged ETFs) if you want to use leverage in a taxable account.
Thanks for the answer. So with that said, how do you feel jumping into these leveraged ETFs in this current bull market with pricing in mind? Would you wait for a dip then buy in a lump sum? I’m already maxed out for 2021, so would need to sell some positions to make room for such a portfolio.
I neither employ nor suggest market timing, so I wouldn’t wait around for a dip that may not come for a long time.
Forgot to mention that MotoTrojan’s EDV variant would also be comparatively more tax-efficient than the Adventure with TMF.
Great write up
Hedgefundie is no longer participating in the boglehead forums.
Thanks!
Sadly, I’m aware. ☹️
Thank you for summarizing the excellent adventure. I started this trip with TQQQ in place of URPO about a year ago. I have been adding $100-500 every week instead of rebalancing. So far its worked well. Late feb 2020 was certainly gut wrenching.
No prob, Rick! Thanks for your comment. I’ve seen many people doing that tech tilt using a combination of TQQQ and UPRO for the equities side. Glad it’s working well for you.
How is TQQQ working out? It took a huge beating , down to $30 from $140, back to $180 now. I am selling puts and selling covered calls, sort of a wheel strategy.
I don’t own TQQQ.
Thanks for a interesting post and site. One quick question why not trade this 55/45 strategy in Traditional IRA for somebody having 15 years horizon ?
Hey RK,
Thanks for the kind words. You could still do that. Would come down to your personal risk tolerance. I wouldn’t be levered up 3x with the bulk of my portfolio with only a 15-year time horizon though.
Thanks for sharing this and it is a very helpful strategy!
I posted my questions here but did not see it showed. If you see it, please just ignore the other one then.
I love this strategy. However, I am just wondering what are the scenarios that UPRO and TMF get delisted or return to zero? ( I know if S&P500 drops more than 33% in a day, UPRO might be zero; however, what about it drops more than 33% in a 2-3 day period and no single day drop more than 33%?)
Also, what will happen to UPRO and TMF this type of market link ETFs, if the parent company goes bankrupt? I am just thinking about different scenarios that can happen which stopped our long term investment in this leveraged portfolio.
Thanks a lot!
Grace
Hey again, Grace. I don’t see any other comments from you that came through on this post.
Delisting or deleveraging would be up to the ETF houses, in this case ProShares and Direxion. These are 2 of the most highly traded (high volume) ETF’s, so I doubt that would happen unless any new regulations interfere. There are some proposed regulations to tighten up the accessibility of leveraged products by average investors, but that’s another conversation. Some 3x sector ETF’s have also recently been downgraded to 2x due to their extreme volatility during the recent market turmoil.
Currently circuit breakers on the S&P 500 kick in at 7%, 13%, and 20%. This happened a couple times during the recent crashes. These leveraged ETF’s reset daily, so drops over several days wouldn’t matter. Because of these facts, technically it is impossible for them to actually go to zero.
The providers going bankrupt would mean the shares would be liquidated at their market value and you’d get that amount in cash. The prospectus for each fund should detail that process.
Scenarios that would be bad news for this strategy, albeit likely only temporarily in my opinion, include rising interest rates, hyperinflation, and bonds no longer being a flight-to-safety asset.
If you have the time and desire, I’d encourage you to read through the Bogleheads threads on the strategy. There are some great nuggets and discussions in there.
Hi John,
Loving this blog.
Quick question: How were you able to enter UPROSIM and TMFSIM as tickers?
Are you on portfoliovisualizer.com?
Thanks!
Hey Randy, glad you’re liking it!
If you read through the Bogleheads thread, one of the users created the SIM data that goes back pretty far. For a quick and easy way, you can use mutual funds and a negative cash position like this.
Awesome, thank you!
What sort of external factors could cause the treasury bonds to fall at roughly the same time as stocks falling? Is there any way to see what this portfolio would have looked like during the 2008 economic crash?
Rising interest rates, hyperinflation, bonds no longer being a flight-to-safety asset, a number of things. Keep in mind though that the bonds are really just for crash insurance in this context. The backtests above include the 2008 crash.
How do you feel about adding an inflation hedge for this? I guess it becomes more like the golden butterfly or all weather but adding some $FXF(Swiss Francs) or $CPI
The Hedgefundie strategy largely intrinsically assumes that post-Volcker (1982), the Fed will be able to altogether avoid a hyperinflationary environment, as well as the fact that any reliable inflation hedge would likely just drag down returns.
I just came up with the identical strategy independently (I initially went with SSO but then found UPRO in the last couple of days) and Googled it to see if anyone had already tried it and your blog came up! Great minds think alike, I suppose, lol.
Just curious, I have yet to put real money against this strategy, but I noticed in my backtest spreadsheet that in the 3/6/20-3/18/20 period the equity crashed 44.20% (based on your 55/45 weighting). It rebounds to new highs by 6/2/20, but talk about a wild ride! Did you experience this wild swing, and if so did you hold on for dear life or did you partially exit? I’m still trying to figure out why on 3/11/20 and 3/18/20 in particular both UPRO and TMF tanked together and what could be done to mitigate such occurrences (the VIXY performed well during that period, but it’s otherwise a drag on performance). Thanks for any insight, and keep up the good work!
Catmango,
Thanks for your comment. I can’t really take any credit. Hedgefundie on the Bogleheads forum came up with the specific approach and reasoning behind it.
Yes, you must be comfortable with the wild swings that leverage brings. These are to be expected during crashes. The time period you noted was the COVID crash. Stocks and bonds do move together sometimes, but usually offer an uncorrelation. TMF is basically acts as insurance in this strategy. On days when stocks crash, treasury bonds usually go up. If you look at the individual days, this is precisely what happened, as expected. UPRO alone dropped more than 60% during the time period you noted.
Selling during crashes is one of the worst things you can do. This usually causes people to sell low and buy high. I hold through dips and usually try to buy more. If your risk tolerance dictates that you’d be tempted to sell, this strategy isn’t for you. This strategy is also only a relatively small part of my total portfolio.
I’d encourage you to read through the threads on the Bogleheads forum, titled Hedgefundie’s Excellent Adventure. Members are actually currently suggesting the proposition of using a small amount of VIX as more insurance. I’m personally not a fan of that idea.
> This strategy is also only a relatively small part of my total portfolio
Is there any real meaning to “partitioning” strategies in this way, or do you just end up with a more garbled global portfolio, and do you do backtesting on that global one?
Great question, Zon. Probably depends on how much of one’s portfolio is going into a strategy like this and how the investor is viewing it. Like I noted, if you’re only putting a tiny bit in, you may be better off just using NTSX. There was a good amount of discussion around this concept in the Bogleheads thread. I think in this instance, at least for me, I’m viewing it as a separate partition because I set aside a specific amount of cash aside as a “lottery ticket” like Hedgefundie proposed and I’m not adding new deposits. Others chose to keep adding new deposits to it and view it as part of the global portfolio.
If you’re only going into this as a tiny lottery ticket, why not just buy UPRO and let your “serious” portfolio be the hedge against volatility? Not sure how much benefit there is to adding such a tiny bond portion.
I guess the main point would be the educational factor of seeing how the bucket turns out over the long run.
Depends on one’s risk tolerance and value of the lottery ticket bucket relative to their “normal” portfolio, I suppose. I personally don’t have any unleveraged bonds in my “serious” portfolio to act as a hedge anyway. That is, my “serious” portfolio is already very volatile and risky at this time in my investing horizon.
If I use EDV instead of TLT
Is it 1.5 TLT ? Or more? Thank you
Hi Eric, yes EDV is 1.5x TLT. But note that TLT is not part of the Hedgefundie portfolio.
Great Job! I started a slightly different variation of the portfolio yesterday! 35% stocks, 20 % 10 year treasuries and 45 % long term treasuries.
I follow the Boglehead thread quite closely but this is a really nice and easy to read summary of the whole situation.
Thanks! That was the goal.