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Adding HFEA strategy to our account

If you are reading our weekly investing and trading reports, you know that we started trading SSO and SPXL leveraged ETFs to our portfolio. The reason for that was that we wanted to outperform the SPY better than just trading single stocks or indexes. We wanted more aggressive growth in our portfolio. The leveraged ETFs (LETFs) seemed like the way to go. Of course, I have options but these require a lot of work and I wanted something more passive, sort of.

But as you know (or may not know), the LEFTs work great both ways. They outperform the index significantly. Although the prospectus says that 3x leveraged ETF outperforms the market 3 times, in reality, it outperforms the market almost 8 times (due to daily rebalancing).

But this feature works both ways. In markets selloff, it outperforms the market too (although not as good as in uptrend, which is good). So today, when the market sold off by 2.70%, the SSO sold off by 4.33%, and SPXL by 6.73%.

And then you have an issue media and pundits will tell you that these leveraged ETFs are not suitable for long-term holdings due to decay and other fearmongering. It is all bullshit. If the decay was an issue, the chart below would look completely different:

 
SPXL chart
 

But, as you can see, if you bought SPXL in 2010, you would be buying for less than $5 and today, your holding would be $129.52 after two splits in 2013 (3:1) and 2017 (4:1). The only issue you have to sustain psychologically is the deeper drawdowns compared to the standard index. If the index drops 3%, SPXL will drop 10% and recovery will take longer. If you cannot sustain this type of drawdowns, then obviously, trading LEFTs is something you must avoid.

So, if I say that SPXL’s claims by pundits are a noise to ignore, is there a risk? Or is buying and holding a 3x Leveraged ETF a no-brainer?

Of course, there are risks. We experienced an extreme bull market so far and in this market, everyone is a king. And when the market goes sideways or experiences extreme volatility, the SPXL and any other leveraged ETF may not perform as great as it was so far. The contango, volatility decay, and other nasty stuff may happen and slowly eat your position away.

So I did a lot of reading on how to invest in 3x LEFTs and protect my portfolio from being depleted when the brown stinky thing hits the fan. There were a few suggestions to sell 3x LEFT when the market drops below 200-day MA or similar strategies. But I still didn’t like the prospect to let the market drop to 200-day MA first and then sell SPXL. In today’s conditions, the market would have to drop to $4,300 (an additional 6.2% drop from today’s close of $4,582). The SPXL would have to lose another 18% before I would close the position to “protect” my investment. But usually, when the market hits 200-day MA, many algos start buying back, unless we see black swans like the 2020 selloff or 2008 crash, etc. But these black swans do not happen very often. And so, I may implement this strategy, but short term, this will not protect my portfolio.

That’s when I came across a HFEA strategy.

 

What is HFEA strategy?

 
HFEA is an acronym for “Hedgefundie’s Excellent Adventure” strategy. The strategy is about a risk parity portfolio. In other words, it hedges one part of a portfolio with negatively correlated another part of a portfolio. In this case, the SPXL 3x LEFT is hedged with long-term Treasuries in our case it would be TMF. The original strategy calls for using UPRO. I think replacing it with SPXL is not a big deal.

You can read about this strategy here or the original thread on Bogleheads.org – part I and part II; if you want to read details about this strategy.
 

Or you can watch the following video about HFEA strategy:

 

 

Implementing HFEA strategy

 
In accordance with what I have read about trading 3x LEFT I will be reducing my exposure from 25% to 15% of my entire portfolio. Here are my steps:
 

  1. Invest 15% of our net-liq in SPXL/TMF HFEA strategy.
  2. Invest 45% in SPXL and 55% in TMF.
  3. Rebalance HFEA quarterly.
  4. When HFEA outperforms the portfolio (rises above 15% allocation), trim the gains and park them in a BSV fund.
  5. When HFEA underperforms the portfolio (drops below 15% allocation), use BSV savings to buy more SPXL/TMF or add new cash.
  6. When the market crosses 50-day MA down, change allocation to 40% SPXL / 60% TMF
  7. When the market crosses 200-day MA down, change allocation to 0% SPXL / 100% TMF
  8. At the bottom or near the bottom of a bear market (when we drop below 20% or more), change allocation to 100% SPXL / 0% TMF
  9. When the market crosses 200-day MA above, change allocation to 45% SPXL / 55% TMF

 

Based on today’s account net-liq value, we will be investing in HFEA approx. $15,000 value. I will be reporting my HFEA separately from our weekly reports on a monthly basis (I might shorten it to weekly reports too, but I want to see first how the strategy performs).

 
This is still a risky strategy. But the entire LEFTs are risky. But I think, risking 15% of my investments is acceptable. I believe the TMF hedge would protect the investment unless the bond market and the stock market crash together in one day. Possible, but unlikely.
 

HFEA charts I will be showing from now on

 
This is my day #1, although I will have to do some rebalancing in the coming weeks, like closing my SSO position and adding a TMF position to my current holdings. Then, raising my allocation to 15%. After that, my HFEA will be set up and running.

Here are the strategy initial charts:
 

HFEA chart

 
HFEA chart
 

HFEA vs. SPY chart

 
HFEA vs. SPY chart
 

Let’s see how this strategy performs long term.
 
 





4 responses to “Adding HFEA strategy to our account”

  1. Ken Koprowski says:

    Ken here.
    I’ve been using exclusively SPXL for awhile. Very simple , buy when ROC (5) & MACD (5,13,9)
    both go positive, sell when they both go negative.
    Last year I was +156% and this YTD +32%
    YTD only in the market 21 of first 47 weeks.
    In cash since 11/11

    • Martin says:

      That’s an interesting approach. I was looking for any indicator that would help me to get our of the LEFT before it starts damaging the account and get back when it is the most favorable. Thanks for posting this. I will look at it and may modify my strategy.

  2. Dale Drader says:

    It will be interesting to see how this strategy plays out over time

    • Martin says:

      I agree. From what I have read so far, this strategy should perform great. In a bull market, the SPXL provides great returns and when the selling hits, the TMF portion provides significant protection muting the selloff. It won’t eliminate it but reduces damage. When SPY sells by 30% the SPXL could lose 90%. Of course, this would have to happen all in one day, but still, the possibility is there.

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