I'm currently running a risk-parity and correlation trading strategy portfolio that is 55% UPRO and 45% TMF with monthly re-balancing. I'm considering running an algorithmic leveraged version of this portfolio using Portfolio Margin using QuantConnect.com. I'd be re-balancing the portfolio daily and re-balancing leverage daily, targeting between 1.5x to 2x leverage. The unlevered algorithm had a max 25% drawdown in 2008 simulating UPRO/TMF. I'd be expecting a 2x leverage portfolio to have a 50% drawdown. The algorithm will be doing mean variance optimization so it'll de-lever itself when market volatility increases. Doing a lot of research on Interactive Brokers and it seems they're very particular about Portfolio Margin, having set house margin to 100% on several equities, quick to liquidate, had errors in margin calculations in the past, etc. Would my portfolio strategy be welcomed over there? What Expected Price Range/Stress Test range does IBKR give for UPRO and TMF? My Portfolio Margin account with Thinkorswim is [-36% ... +30%] for UPRO and [-21% ... 21%] for TMF. Assuming those test ranges remain then I'd have a 2.777x leverage ratio available to borrow, so a 25% unlevered draw-down shouldn't create a margin call at 2x leverage. How can I verify IBKR's PM test points for UPRO and TMF? I haven't funded the account yet and the paper account is Reg-T. Will IBKR switch my paper account to Portfolio Margin? It's my first time using TWS and I feel completely lost. Will IBKR consider me a "High Risk Margin Account" and charge me an exposure fee? I'm worried as from an outside perspective loading up on 3x ETFs look really risky but this portfolio only has a 0.50 correlation coefficient to the US stock market and holds up tremendously well from 1985+ onward. The algorithm paper trading gained 3% over this most recent coronavirus market scare. I'm looking to drop around $200k of cash for the PM version of this algorithm and will maintain above 100k net-liq at all times. I don't want to go through the hassle of such a substantial funding without doing my due diligence first. Will this trading be welcomed at IBKR? I'd hate to transfer over then find out I'm not welcomed.
I was mostly wanting to get away from ToS/TDA due to the 8.50% effective margin rate I was considering running the strategy with. After reading up a lot more on how IB in the past handled liquidation issues I think I'll just stay at TDA and finance my leverage through shorting box spreads on SPX. I even read one post that people recommend putting GTC orders on their box spreads at IB to prevent their algorithms from liquidating their financing lol.
I have run a lot of backtests in portfolio design and I think what you are doing is not a good idea. If there is a bear market in stocks driven by a rise in interest rates (say in an inflationary enviroment) you are going to be pretty much wiped out. That's what happened in the 70's. If there is a sovereign debt crisis (driven by entitlements) in the US (like it happened in the UK in the 1970s) you also get pretty much wiped out Consider adding 10-15% gold to this portfolio and significantly decreasing leverage. With the 10y at 1%, I dont think its time to be levering in bonds. Recent history is not a good guide of what will happen going forward
Thanks for the gold suggestion! I'll take a look into that. I'm not running my entire portfolio on this - I can meet a 100k-200k margin call easily. I have about 200k annual after tax take home pay and my expenses are around 45k a year. Yes it'll hurt but I'm young, 27 years old, and can recover. I do agree with you the market has a lot of weak money in stocks yield chasing with the ridiculous low rates though. However the 70s were completely different - US treasuries were callable back then. Can you say all downside with no upside? My back testing on it the portfolio holds up under monte carlo simulations up to 6% rates. Past that it falls apart so it's also a bet on rates not going past 6% for 20+ year treasuries. I feel the Fed is fundamentally different than the 70s too and jacking rates to say 16% will be a ton of harm all around. My other concern is CAPE ratios is at an all time high of 29-30. I'm thinking of deploying this strategy after say a 30% to 50% equity sell off. It's hard to say if now is the right time.
So you are young and are looking to increase returns by taking on more risk. I would suggest you wait for better market conditions to jack up your leverage, now after a historical bull run in both stocks and bonds, it just seems a terrible time to jump in with a lot of leverage in both. Wait for a big dump in both markets, terrible headlines all over the media, huge outflows out of retail funds, etc. Then jack up the leverage If you are looking for more returns right now, put 2-3% in bitcoin or something. At least you will be limiting your losses significantly
Also, your portfolio might 'hold up' to rates up to 6% but if it goes to 4.5%+ for all intends and purposes you will be wiped out because -It might take more than a decade for you to make your money back (maybe even more when you consider inflation) -You might stop using the strategy because emotionally, it will be devastating for you -It will not be fun for your life to lose money in the markets year, after year -Stocks will go down massively as well, perhaps you didnt consider that in your monte carlo
Assuming a max drawdown of 25% for the strategy and Reg T end-of-day margin of 50%, one can compute the max leverage for $100 cash obtained under max drawdown time: (debt + 100 ) x 0.75 = debt x 2 Hence debt = 60 So your max leverage should be 1.6 given a max drawdown of 25%. At max drawdown time the equity loss is -40%. In other terms, under Reg T end-of-day margin, we have: max leverage = 1 + (1 - maxdrawdown) / (1 + maxdrawdown) max leverage = 2 / (1 + maxdrawdown)
Looks like you came over from Bogleheads most popular "Hedgefundie" thread. Ironic for the "stay the course" crowd. Most of the answers for your questions is already there in their mega-thread. You are already using triple levered funds. From understanding your question, you want 4.5x to 6x leverage? Are you rebalancing monthly or daily? Since you are asking portfolio margin,you are implementing this in taxable account. Have you considered tax consideration? Unless you are rebalancing with new amount and taking long term tax gains, tax consequences are big. IB liquidation algo's are kind of black box. Obviously PM account is better than reg T margin account for this type of leverage. I would rather use mini or micro futures. Yes they can convert Reg T to PM account after signing additional paper work,if i remember correctly Here is the exposure fee info for IB https://ibkr.info/node/3114