And it actually works. I used 0.1 slippage and it can handle more if the rebalance period stays at 4 weeks. I tried other leveraged ETF’s and it works with them also.
It does really well during bear markets and at first glance could be used with market timing to increase returns during bear markets. Does this seem feasible?
Mark, thanks for the idea. I have been thinking about this for a while and it would certainly have worked over the recent past but what do you think about the following comment by “klarsolo” to the Seeking Alpha article?
"You may be hedged against a quick move in any direction, but you’re not hedged against a strong trend that lasts for weeks or even months. Or what about a strong trend that lasts for years? How do you manage the risks there? How do you rebalance your ultra ETFs?
Don’t get me wrong - I like the strategy, but I would not advocate anybody doing this without having a good understanding of the risks. " - klarsolo
I don’t think runaway markets matter since the screener shows you make money. The question is how much slippage would you incure in real life trading?
Using 0.1 slippage during bear markets this strategy performs extremely well. Good return and average volatility. Not sure if it does in real life because I don’t know the real life slippage.
During Bull markets it does not perform as well as most P123 models so I would not consider it.
I looked into this strategy a while ago, and if I recall correctly, it is difficult to short leveraged ETFs.
I believe that most of them are “hard to borrow,” so it would be costly (high interest rates) to short them. Additionally, there would be a risk that your broker would be forced to close at least one side of your position at some point in the future, which would either unwind your strategy, or leave you unhedged for one side of the market.
Check with your broker to see if you can short both UPRO and SPXU.
By the way, these potential constraints could also pose a problem for the hedging strategy feature for P123 portfolios.
This is an old post but my experience may help someone…
“there would be a risk that your broker would be forced to close at least one side of your position at some point in the future, which would either unwind your strategy, or leave you unhedged for one side of the market”
=> IB did it to me last year in my supposed maket-neutral strategy (shorting a pair of 3x opposed ETFs on the same sector). And the closed side was still shortable on their site, it should not have happened. If you are not able to close yourself when they send you the alert, they force the order. The only guarantee you have is to get price between the low and the high of the day.
BTW don’t forget to take into account the borrowing rate, it is higher than for other kinds of ETFs (and vary from one day to the other)
Summary: backtesting this kind of strat is definitely not reliable.