I wrote my thesis on this subject. Slow active allocation rules like selling 2x leveraged for 1x fund when hitting x volatility percentile and buying back in when we drop below the volatility percentile can GREATLY reduce downside risk.
OOS I managed to have near identical return to 2x's return, but shrunk the MaxDD from 78% to 52%
It's actually being reviewed currently, not sure how much info I could/should share online prior to it being validated by my thesis supervisors, however if there's anything specific you'd like to know I can tell you. My literature review basically delves into the mechanics that you highlighted in your post.
I can probably DM you the core content of the methodology/empirical results/implications, if you're really interested. But main takeaway : monthly signal (yes really, super slow), realized 21-day annualized vol percentile as the signal, very simple switching rules (but they are still a design choice, thereby introducing some bias at least), 5Y/1Y IS/OOS periods, 2005-2026 OOS (so we don't observe the effects of the dot com bubble, also a form of bias, though we do see GFC), and yeah as I said, the results :
- Annualized return of ≈23%
- MaxDD of 54%
- Max recovery time of 2.2 years (massive improvement over the 6.4 Max Recovery of static 2x ETF)
--> So same annualized return but stronger Calmar ratio than 2x ETF, which in my OPINION (not a fact) is waaaay more important than Sharpe or even Sortino ratio. People (or me, at least) don't care about their investments going up and down sequentially, people care about DRAWDOWNS. A 78% MaxDD is a death sentence for most investors.
Interesting article, but it missed one crucial point about leveraged ETFS, especially those that have grown overtime: it all depends when WHEN (timing) an investor buys TQQQ or sells it. For instance, if TQQQ were around in December 1999, to buy and hold it by then would be a disaster. But if bought in June 2009 and kept it for the long haul, it would worked fine.
I wrote my thesis on this subject. Slow active allocation rules like selling 2x leveraged for 1x fund when hitting x volatility percentile and buying back in when we drop below the volatility percentile can GREATLY reduce downside risk.
OOS I managed to have near identical return to 2x's return, but shrunk the MaxDD from 78% to 52%
Interesting. Can you share your thesis here?
It's actually being reviewed currently, not sure how much info I could/should share online prior to it being validated by my thesis supervisors, however if there's anything specific you'd like to know I can tell you. My literature review basically delves into the mechanics that you highlighted in your post.
I can probably DM you the core content of the methodology/empirical results/implications, if you're really interested. But main takeaway : monthly signal (yes really, super slow), realized 21-day annualized vol percentile as the signal, very simple switching rules (but they are still a design choice, thereby introducing some bias at least), 5Y/1Y IS/OOS periods, 2005-2026 OOS (so we don't observe the effects of the dot com bubble, also a form of bias, though we do see GFC), and yeah as I said, the results :
- Annualized return of ≈23%
- MaxDD of 54%
- Max recovery time of 2.2 years (massive improvement over the 6.4 Max Recovery of static 2x ETF)
--> So same annualized return but stronger Calmar ratio than 2x ETF, which in my OPINION (not a fact) is waaaay more important than Sharpe or even Sortino ratio. People (or me, at least) don't care about their investments going up and down sequentially, people care about DRAWDOWNS. A 78% MaxDD is a death sentence for most investors.
Great breakdown of volatility drag.
This risk is exactly why I manage my portfolio through a strict dual mandate to balance growth against decay.
I anchor my core in VT for unconstrained global equity exposure, while systematically deploying a covered call overlay like PAYG.
Relying on options premiums to extract consistent cash flow mitigates the exact performance drag you highlighted here.
Interesting article, but it missed one crucial point about leveraged ETFS, especially those that have grown overtime: it all depends when WHEN (timing) an investor buys TQQQ or sells it. For instance, if TQQQ were around in December 1999, to buy and hold it by then would be a disaster. But if bought in June 2009 and kept it for the long haul, it would worked fine.
Leveraged ETFs are a path tool, not a thesis. The scarce skill is still deciding which few exposures deserve capital after vol and carry reprice.
Leverage can be a powerful tool… if you can stomach the drawdowns.
https://www.aqr.com/-/media/AQR/Documents/Insights/Journal-Article/Leverage-Aversion-and-Risk-Parity.pdf
Each to there own methods, I encourage everyone to juice up and hold LEFT I have 3 strategies
Quarterly entry’s
80/20
And a timing strategy.
All three are smashing it