[bberenberg]

I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0]

Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product.

[0] - https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...

[mgfist]

2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example.

A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.

[cj]

You can achieve 2x leverage without the risk of margin calls by buying ETFs like SPUU (or SPXL, UPRO if you want 3x leverage).

[casercaramel144]

That's a really bad idea, those rebalance daily, so you are basically betting against short-term volatility (if spy goes down 10% in a day then up 10% the next, you are down 1% on spy, on a 2x levered etf you are down 4% or 4x the loss). Also both fees and slippage are really terrible on all levered ETFs

If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.

[arcticbull]

And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%.

The reason is exactly what you described actually. If the underlying exhibits positive momentum, generally trending up instead of oscillating back and forth, the daily balancing works for you instead of against you and the ETF outperforms the target multiple of the underlying.

Yes, if your S&P returns over 3 days are +10%, -10%, +10% then SPY is up 8.9% while UPRO is up 18% (2X, not 3X).

On the other hand if your S&P returns over 3 days are +10%, +10%, +10% then SPY is up 33% while UPRO is up 120% (4X, not 3X).

The big levered ETFs have reasonable volume and limited slippage for any volume retail investors would be trading. Fees are like 0.9% which all things considered isn't bad - given their vast outperformance.

I'm not saying go all in on these, what I'm saying is that your analysis of the levered funds is missing some important details which show up on a quick backtest. If you understand the products and what bet you're making with them, they can be quite reasonable to hold long term - despite popular misconceptions.

> If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.

Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.

To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F.

If you insist on trying to trade the S&P 500 with options (especially if your expiration is only 6-12m away) use SPX or XSP -- not SPY. They're cash-settled European index options, so no early exercise to worry about, no dividends to worry about and they get 60/40 capital gains treatment no matter how long you hold them for.

[pinkmuffinere]

+1, the criticism of “if s&p goes up and come back down, leveraged investments lose” is just insufficient as a criticism. It examines only one case. I’m probably 30% in SPUU for years now, and would like to hear real criticisms — do you have any real criticisms to share? I legitimately have found so little competent commentary on it, and I think I understand the risk I’m taking, but don’t want to miss an opportunity to get considered input.

[jcalvinowens]

> I’m probably 30% in SPUU for years now, and would like to hear real criticisms — do you have any real criticisms to share?

I'm no expert. But it seems like writing out of the money options: it's "free money" until the market suddenly moves against you, and you get your head chopped off. When that inevitably happens, the loss has a good chance of more than wiping out all your prior gains.

[mgfist]

They picked a great time to launch it!

Not sure it would've gone so well had it happened in 2007

[casercaramel144]

Finance SWE here, sorry if what I say is wrong. Please correct me if that's the case.

>And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%.

Isn't this just hindsight bias? You market time to right after 2008 crash. Those two dates are probably the best possible because from 2009->2020 we had an 11 year uninterrupted bull run. If you bought in 2020-2021 you would have been screwed for 3 years at the least. If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.

>Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.

Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough. You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).

+1 for European options, I forgot you can buy those on index funds, is the liquidity enough on deep OTM calls to be worth it though?

>To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F. I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!

[arcticbull]

> Isn't this just hindsight bias? You market time to right after 2008 crash.

Yes absolutely, I just picked when the product launched.

I wanted to point out to parent that the daily balancing isn't just a bad thing, it can be a good thing - it depends on how the underlying performs. You are right it cuts both ways though and you may have to sit in them for years to break even. Note UPRO actually somehow pays a dividend.

> If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.

What do you mean by 10X leveraged calls? Like 10-delta? What was the spread between implied and realized volatility over that period? Ultimately your options outcomes are really based on realized volatility exceeding implied volatility (otherwise you break even or lose).

> Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough.

Parent said contracts that expire in 6 or 12 months on SPY. That means short term capital gains at expiry, and using SPY instead of SPX means you have to deal with early exercise and dividends.

Since you can't buy contracts too far out in time, so you have to sell, roll or exercise. In a tax advantaged account maybe that matters less. Was your proposed strategy to roll? If so, how far before expiry, and to what level?

> You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).

Over what duration? We need that to figure out the rough APR of the implied borrowing you're doing.

> +1 for European options, I forgot you can buy those on index funds...

On indexes not index funds! SPX option notional value is literally the S&P 500, in index points, times $100. They're big. XSP option notional value is basically the S&P 500, in index points, times $10.

> I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!

I was suggesting the underlying futures contract rather than a futures ETF. /ES is big, /MES is much smaller.

[unyttigfjelltol]

... "permanently high plateau" and all that...

[chongli]

You have to pay interest when you invest on margin and a margin call can wipe you out. Investing on margin is serious riverboat gambling, not retirement saving.

[asdasdsddd]

I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.

[ddmitriev]

I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver.

This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.

[chii]

> have to pay around 50% of each year's gains in taxes.

> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year

That's crazy.

I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.

This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.

[casercaramel144]

Anecdotally (can't say how I know), many firms did very well in the 2020-2021 Covid crash, also its quite cheap to say buy 50 million in far OTM puts to guard against black swan events. It's far more likely that a slow slide in SPY will show some Beta correlation than anything else.