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Post by brosin on May 8, 2011 12:00:33 GMT -5
I have also seen decay referred to as "reverse compounding" and compounding referred to as "reverse decay" - it is the same concept either way you look at it. I went through and tried to compile all the threads related to this topic from both the Yahoo Board and here in Fastopia. I saw that the topic was starting to rear it's head again (interesting?) - It is important to note that it works both ways - both bull and bear ETFs can outperform or underperform stated goals (FAZ can be up more than 3x the absolute value of the RIFIN's move) over a span of weeks to months even though both sides will eventually trend to zero over the long term (many years).
- Shorting one or both can do much harm quickly if the market goes quickly in one direction
- Bear ETFs decay and compound much more rapidly than bull ETFs if we assume that the market goes down much more quickly than it goes up (has been true in history but is still just an assumption)
- When the trend is in your favor over a longer term, there is actually very little decay as the compounding will more than offset it
First, this an academic work from Dec 2009 on this topic (a bit long but it was helpful to visually see it mathematically and graphically): The Effect of Time, Trend, Volatility, and Leverage on Relative Returns Threads or comments dedicated to the topic: Yahoo Days: FAS 101: how it does 3x RIFIN, why it has legs, etc 23-Mar-09 05:47 pm by longtimeskferswitches Serious discussion - shorting FAS/FAZ [/url] 9-Jul-09 11:37 am by tendermyshares how a hypothetical double short fared in the last 20 trading days [/url] 16-Jul-09 06:26 pm dualism2 For those that Doubleshorted [/url] 23-Sep-09 04:30 pm by CosmicHemmorroid FAS... a 4.8X Bull fund? 14-Oct-09 05:02 pm by hammondkeys Interesting study, FAS+FAZ vs. SPX [/url] 11-Dec-09 11:11 am by Cosmichemmoroid Fastopia Days:(threads) Who is eating the decay in the 3x Funds Jun 19, 2010, 6:49pm trading4dough FAS/FAZ decay estimation [/url] Jul 1, 2010, 6:06pm papasloth FWIW - FAS Stats Since March 9, 2009 Aug 21, 2010, 5:08pm actuarynomore (Posts)Since FAS is supposed to return around 3X the daily change in RIFIN, and FAZ is supposed to return around -3X the daily change in RIFIN, we can estimate the value of FAS and FAZ by tracking and scaling the daily change in XLF. In fact, if you run this exercise, you find that FAZ returns around -3.2 the daily change in XLF and FAS returns around 2.6 times the daily change in XLF. Here you go. DRN and DRV with decay based on IYR. DRN actually returns around 2.6X the daily change in IYR, while DRV returns around -3.3X. Estimated values for DRN and DRV based solely on IYR are shown in green, and you can see that the estimated values match the actual values pretty well (which means it's working). FAS has not decayed in the least in 18 months. RIFIN is up 128% since low on March 6, 2009 FAS is up 561% since low on March 6, 2009 Regarding decay, the following is what blows my mind relative to FAS/FAZ from the last time RIFIN was in this territory: Date | RIFIN | FAS | FAZ | | 05-06-10 | 815.98 | 28.17 | 14.29 | | 05-07-10 | 805.07 | 27.06 | 14.81 | | 05-14-10 | 817.50 | 28.00 | 13.75 | | 05-17-10 | 817.16 | 28.00 | 13.77 | | 11-04-10 | 815.18 | 25.08 | 11.05 | | 11-09-10 | 806.48 | 24.49 | 11.22 |
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Post by cosmic on May 8, 2011 12:08:31 GMT -5
I couldn't remember that poster's name - longtimeskfswitcher, he was the one. I had a number of go-arounds with him concerning his FAS valuation claims. He had created a simulation of some sort which projected FAS to ridiculous values.
I used a monte-carlo simulation to show it wasn't going to happen.
So far, it hasn't happened.
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Post by brosin on May 8, 2011 12:13:32 GMT -5
Yeah, I can take it out of there if you want - one of the links does lead to that thread you're referring to. Dual had called them out immediately for assuming an unrealistically strong market up move (were assuming a 5% daily XLF move).
I more attached it for their attention to how FAS works (swaps) and pointing out what compounding and decay were... some value there imo
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Post by timber on May 8, 2011 12:30:13 GMT -5
i will just keep my faz,, tza and rest of the scams short....until they stop making money for me
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Post by brosin on May 8, 2011 12:54:50 GMT -5
but timber 'once they stop making money for you,' isn't it possible that it will be too late?
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Post by tajmahal9898 on May 8, 2011 13:08:24 GMT -5
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Post by tajmahal9898 on May 8, 2011 13:41:37 GMT -5
What Is Pairs Trading?
Pairs trading has the potential to achieve profits through simple and relatively low-risk positions. The pairs trade is market-neutral, meaning the direction of the overall market does not affect its win or loss.
The goal is to match two trading vehicles that are highly correlated, trading one long and the other short when the pair's price ratio diverges "x" number of standard deviations - "x" is optimized using historical data. If the pair reverts to its mean trend, a profit is made on one or both of the positions.
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Post by timber on May 8, 2011 13:57:31 GMT -5
thanks taj thanks brosin
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Post by timber on May 8, 2011 14:03:02 GMT -5
but timber 'once they stop making money for you,' isn't it possible that it will be too late? even in the mist of the crashes skf got killed later.... i dont see how they keep their value??  |
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Post by tajmahal9898 on May 8, 2011 14:22:59 GMT -5
i will just keep my faz,, tza and rest of the scams short....until they stop making money for me Timber, the short position (FAZ, VXX, TVIX,... 0) for a veryyyyy long time, it is quite possible that one can get 80%-90% oN your initial investment. Key is that you would have to hold the equity for a long time but the investment is not immune to market risks. Said this, such a strategy should require minimum active management. With active management (such as trying to time the market), return could be higher for the same duration. Also, with derivatives (options) return could be higher in a short duration - but this involves risk. |
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Post by brosin on May 8, 2011 14:31:35 GMT -5
but timber 'once they stop making money for you,' isn't it possible that it will be too late? even in the mist of the crashes skf got killed later.... i dont see how they keep their value?? it's not a matter of keeping their value, but it's a matter of how much the margin requirements become during those crashes - for the first couple months of 2009, the bank index was down >30%.. an FAZ short position would be down around 90% (could be a little less or more) - unless you are only using a very small percentage of your portfolio on that, the losses are extraordinary, and if forced out of the position can be devastating Of course this is all in a market crash scenario, which is obviously not common - I'm just pointing out that there are risks in all scenarios with these.. as Dual had said in one of those threads above, there's no such thing as easy money |
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Post by ask2lern on May 9, 2011 6:36:38 GMT -5
Good info Bros thanks...................one question I have is that you say bear funds decay more rapidly.......... is that always or just in an uptrending market?..............thanks again for the info.............GL
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Post by cosmic on May 9, 2011 6:42:08 GMT -5
Ask, I'll take a stab at it because I don't 100% agree with Brosin on the bear comments. Our outcomes are similar but the reasons are different.
In a move either way that is violent and trending, the bull or bear fund can outperform 3x.
But the bear fund, because of the way it has to be set up to give an inverse reading, necessarily costs more to create and manage. Fees are ALWAYS higher on the bear funds it seems, regardless of trending market. So on a daily reset perspective, a little more gets whacked from FAZ than FAS on a daily basis.
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Post by brosin on May 9, 2011 8:27:24 GMT -5
Decay and compounding is not referring to fees and expenses though, just the math of a daily compounding vehicle.
The assumption of bear funds decay faster is because of how markets typically go down much faster than they went up (measured by number of days - most bear markets don't last too long). Even in bear markets, during the snapback portions is when the bear funds really show their rapid decay. I'll try to explain it more later on when I have a little more time
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bjxxxx
Commodities Trader
Posts: 135
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Post by bjxxxx on May 9, 2011 8:57:13 GMT -5
I ran numbers last year and concluded that in a sideways/boomerang period, bgz decays a lot (20-30% annually), bgu very little, less than 5% . I think as Brosin and Cosmic indicate, in a trending market, I found that the right-direction stock outperforms and wrong stock underperforms.
So for the last year, for my standard long play, I shorted bgz. I thought over the long haul the decay would be my friend, and if the market really dives, I think it may be safer to be short, since there's big counterparty risk in the leveraged etfs.
Went back the drawing board over the weekend. When I checked 4 directional periods, I found that BGU outperformed both ways: more than 3x up; less than 3x down. BGZ outperformed, in one instance wildly (3-9-09 to 9-9-09), in up markets -- i.e., less than 3x down. But I got mixed results for two down periods: one more and the other less than 3x.
But for the more recent strong trending period -- 9/1/10 to 5/2/11 -- my bgz overperformed dramatically, which cut my profit -- since I was short -- big time. The Russell 1000 was up 31%, but bgz dropped only 60%. That's a 58% overperformance on an annual basis.
I don't have a strategy for shorting both (except as maybe a short term hedge). It does not work in a trending market, and in a sideways market, you'd be better off shorting the bear fund, eg, bgz or faz. But, if you discount counterparty risk in a true market plunge, it looks like BGU is a good long play, which surprised me. (I don't know how to assess decay in faz.)
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