Hedgefundie's Excellent Adventure Summary

Hedgefundie's Excellent Adventure was a portfolio made by a boglehead's forum user, Hedgefundie, inspired by risk parity. It uses leveraged ETFs UPRO and TMF. It was introduced in a post in February 2019. The post explained that a portfolio with 40% UPRO, 3x daily S&500, and 60% TMF, 3x daily long term treasuries would have handily beaten the market.

HFEA was inspired by Market Timer's thread. Market Timer was a user who, inspired by lifecycle investing took out 2x leverage on the S&P 500 but went bust in the 08 financial crisis. Hedgefundie realized that, by adding bonds to the mix, a portfolio can survive recessions. There were also some prior examples of portfolios using leveraged stock etfs with leveraged bonds 1

In the second thread Hedgefundie changed the allocation to 55% UPRO and 45% TMF because of concerns with interest rates being so low.

These strategies involve leverage, and therefore they can go to zero. Do not implement them if you're not prepared for the risk.

Backtest

The original HFEA backtest does not include the time before the 80's. This is potentially problematic because of the 40 year bond bull run. Treasury performance before the 80's was different because treasuries were callable. With that being said, hfea can perform well with rising rates. Hedgefundie thinks that stagflation won't be an issue because the central banks have learned their lessons. Since UPRO and TMF were made in 2009, the backtests shown are made using models from the Simulating Returns of Leveraged ETFs thread.

Those who are concerned about stagflation risk and bond performance should probably use less leverage and/or include assets that would perform well in stagflation. Value/commodity stocks, tips, and gold could fill that role.

Alternative Hedges

Volatility

Many users are concerned about the long term risks of the bond portion of the portfolio, so they have tried out alternative hedges. Volatility ETFs like VIXM and VIXY track the S&P 500 volatility index. When the market crashes, volatility ususally goes up. The downside of volatility ETFs is that they decay over time.

Perfectuncertainty uses calls on the vix index as a hedge. 1 2 3 4

Gold

Assuming gold more or less holds its value and is uncorrelated to stocks, it can work as a hedge for the stocks portion.

TODO

kerstverlichting european implementation

Volatility Decay

Allocations

Leveraging Methods

Rebalancing

shorting the inverse etfs

Has tail risk and other implementation issues 1

Thereum using call credit spreads to "short" TMV