I have always been 100% invested. So I use inverse ETF’s on margin (leveraged and non) to hedge my long positions in case of a crash.

Without a crash investments will either go up. Or remain flat.  An investor can use dividend cash, options selling, and etf capital gains selling if they / I need cash immediately.

It worked out better than I could have expected during the 08 crash.

People, I know what the knee jerk reaction will be, but just relax and do the math.

suppose you have 100k invested in real estate ETF’s- they generate high yields, so, instead of keeping 30k in the bank as emergency cash, you purchase 30k worth of inverse etf’s. If real estate crashes hard, that 30k will increase in value. If real estate rallies, your inverse fund won’t go to zero, but your longs will certainly go up in value, and you will collect dividends all the while.

Look at the performance of FAS and FAZ long term post crash. I held them both for years. faz went virtually to zero, but fas went to the moon.

Look at performance of xiv since the crash.

Would I have held fas and xiv long term without a hedge? No way. But I made more going long with a hedge, than if I didn’t own it at all without a hedge.

I am not talking about a 50 / 50 long short split. This isn’t about boxing something in. my premise is simple. Instead of keeping cash on the side, purchase an inverse of what you hold long. If the market really crashes, you will be better off than if you were long only. If the market only goes up, your inverse will lose value, but your longs will make money.

Does anyone here expect the market to double from this point forward? If so, my strategy will lose badly. As the market goes up, one will have to add to the inverse position.

As I said, your longs will generate dividends, and selling calls or puts once in a while will keep costs down.

I have beaten the market for the last five years. This year I am up 20% instead of 28% and it is because of my inverse etf’s. Why did I beat the market- because I bought fas and xiv and real estate with a big bet. I was hedged on all three, if I was not hedged, my results would have been through the roof even more, but as I said, without the hedge I would not have gone long as much as I did, and held on as long as I did.

fas went up 500% post crash, that more than made up for the lost money in faz.

why is this so hard to understand.

buy an inverse fund, if it goes in the money, you get your cash back with a profit. as the market drops, your inverse increases. if the market continually goes up to infinity, your results will drag. but your longs have gone up more than your emergency fund would have generated.

 

  • 1st: i am not selling anything.
  • 2nd: i am not selling anything.

 

all i am saying is this:

  • if 40% of your portfolio is long a certain sector, then perhaps you should hedge it with a leveraged mirror inverse.
  • leveraged etf’s can work against you, but they can also work in your favor over the long haul.
  • one of the most persistent myths out there is that levered etf’s are money losers. this is false.
  • Look at the performance of FAS vs XLF post crash- now let me know which you would rather own- for years and years that is.
  • 3rd: i prefer leveraged etf’s to options as a hedge
  • 4th: i believe levered inverse etf’s ARE an asset class
  • 5th: the only way to be truly diversified is with levered inverse etf’s.

i don’t need to dig into my portfolio to prove or disprove anything here, but i have given examples, leveraged vix instruments and fas. i was long short both of them, and many others.

my point is this: i was long /short on both etf’s, more long than short, long performance dragged due to my short, but i would not have held my long for so many years if i didn’t own the short, and yes i had to average down multiple times on the inverse, but even with the hedge drag my portfolio did well.  my strategy isn’t limited to fas or the vix, if you own US stock you can hedge it multiple ways, but i believe that any hedge is better than having a huge large amount of cash sitting on the sidelines.

bond etf’s have lost how much this year? look at TLT, i use my strategy with bond etf’s as well. I believe that in this world, we need to hedge everything, including bond funds, they sell leveraged inverse bond funds, and there are ways to hedge currency and now they even sell etf’s with interest rate hedges.

“iShares Plans Active Interest Rate Hedged Bond ETFs”

  • after every single asset class went down in the last crash, i learned that the only true way to diversify, is to be hedged at all times.
  • *my intention is not to brag here.
  • *look at FAS performance post crash, not from precrash to today- take splits into account.

take a look at skf, uyg, ytd performance to see the divergence. also look at their unleveraged indexes. i am not going to pull out dates and sales. my premise is simple.  If you own three index etf’s, one could purchase their leveraged mirror inverse.  how much should you borrow, that is your choice, it could be ten to 30 percent, it could be the dollar amount of your emergency fund, or half as much as your EF. My entire premise here, is to prove that an emergency fund should not be needed if you properly hedge. in a bull market, you will need to average down on your inverse or sell calls on the long in order to maintain the hedge.

  • i refuse to go 100% long with a huge emergency fund. for some, that is the ideal situation, but i will never go 100% long ever again.
  • if interest rates were much higher, i would keep cash, but that isn’t the world we live in.
  • look at YTD performance of a FAS / FAZ 80 /20 split on that pairing against the SPY. YTD return of this pair 72%
  • Also check 2012 performance on that split against what the SPY did for that year. 2012 return 56%

All i am saying is this. I let my winners run with FAS, but i did so, because i had that FAZ / tvix pairing. If i was 100% long on FAS, i would have cut and run much sooner- thereby my gains would have been substantially lower.

  • do an xiv / tvix 80 20 over the last 36 months and look at the performance vs the SPY. same story. 113% return on the vix pair for the last 36 months, and yes i held them for that long.
  • the hedge gives me the confidence to let my winners run.
  • some of you may not need the crutch of a hedge. your crutch is that emergency fund. that is fine, there is nothing wrong with that.

my points are simple:

  • an inverse mirror hedge that isn’t evenly split, can be a substitute for cash.
  • leveraged etf’s are an asset class
  • ditto for inverse etf’s
  • i believe for true diversification, one needs both.
  • suppose you are long an index, 100k
  • you also have 30k in an EF
  • your sell your emergency fund of 30k
  • you purchase 30k more on the long side
  • you purchase 20k on the 2x leveraged inverse etf
  • etf goes up 28%
  • inverse etf goes down 40%
  • what does your portfolio look like? how much have you lost due to the hedge?
  • now what if your portfolio goes down 40% the long position will be worth 78k
  • 2x inverse etf?  will probably be worth 50k*
  • on a large and recurring perceptions drop, the leverage compounding will exceed 2x.
  • which scenario was better on a 40% drop?
  • an emergency fund of $30k and no margin or leverage? or the above scenario.
  • assume:
  • dividend yield is 2%
  • margin is 1.5% – interactive brokers
  • you can also lend your shares at IB

Let’s use this for an example. You go long 100% an etf, you purchase another (margin) 20% of a 2x inverse etf in the same index.

The long etf pays a dividend; if the market crashes you sell the inverse hedge at a profit, that profit just happens to be your emergency fund. Can this lose money- sure, in a trending market, with no volatility, your inverse will decay, but dividends are still coming in.

This isn’t a panacea, it isn’t fool proof, it isn’t a guaranteed money maker. all I am saying is that I believe that leveraged inverse ETF’s have done better for me than holding an emergency fund, and the only reason that is the case is that my longs went up.

I have not seen an idea like this posted anywhere else, so I thought I would start the message. if you think I am wrong, tell me why with math, but don’t attack me just because you think it’s a “stupid” idea, all I know is that this strategy has worked out for me, this year my results dragged.  the way I look at a long short, is pretty much the same as a vertical credit spread, in a crash, the short put will be put to you, but the long put will make money. You wanted to own the shares anyway- however, in a bull market recovery, sell calls on the underlying, if they are called away, rinse repeat.

Living through two crashes, I believe everyone should be long short, almost like paying for insurance, no one wants to do it, but if you have a fire, you lose everything without insurance.

I am not saying 100/ 30 is an ideal long / short ratio, and I am not recommending leveraged inverse funds, I am just saying that for me, being 130% invested and maintaining a long short portfolio has returned better results than having a very large emergency fund. I am extremely aggressive in my accounts so of course I use leverage, heavily, but in a crash scenario, would you rather be long / short or long only with an emergency fund?

If there is a crash, the inverse ETF will gain in value. If my portfolio goes up in value substantially, the inverse instrument will lose value, I will then add more funds to the inverse position.

Finding the right mix of long to short ratio is a personal decision. But if one has leveraged inverse ETF’s and the market really tanks, they will make more than if they help a large amount in cash. DITTO in a bull market, cash is trash, put to better use.

Don’t forget to add XIV, TVIX, in for total return. Also bake in all other longs you may, or may not have. I use leverage an extra spice, but it’s there only to add flavor to the rest of boring, buy and hold portfolio.

* I am not saying an 80 20 split is ideal. Depending on your portfolio, and how much protection you want or what your bias is, parts change. Take a look at YTD and TTM performance of GLD, now what if you added in an 80 /20 gld / gll 2x inverse. 100% TTM GLD lost 27% if you had an 80 / 20 you lost 9% TTM.

I’ve given examples. I was long only total market, long short financials, vix and gold the above.

You ask about bonds, and the answer is, it depends.

Bond ladder, if you hold until maturity no worries- if you need to sell early, this year, you lost principal. Bond ETF’s have lost principal this year as well.

The answer is- leveraged instruments are hard to calculate in a hypothetical, due to the effects of compounding and decay. Under certain conditions they will exceed 2 xs, other times they will decay, depending on whether there are successive up or down days.  Look at the examples I have provided. It’s not that I won’t answer your question; it’s that leveraged instruments diverge from their underlying  indexes depending on market conditions. Plug in some real world examples with the tickers and dates I have given you, and you will see what I am talking about.

What I am trying to say is that, if you rebalance from time to time, and own leveraged instruments (both long and short), your portfolio has a chance to outperform the market. And, you have increased your chances to survive a horrible bear market.  I would rather maintain a leveraged long short portfolio, than have cash on the side. Under the right market conditions, your leveraged hedge has a chance to make more money than if you only held an emergency fund.

I guess what I am trying to say is: after seeing people lose almost everything by owning C, GE, BAC, GM, ETC, that if someone owns a large unhedged position of any asset class they can lose it all in an instant.

Oct 28 2013 with an 80 /20 split

  • REM long / SRS inverse.
  • March 04, 2009
  • 80 /20 FAS / FAZ
  • 80/ 20 XIV / TVIX

Take a look at how an 80 /20 DIA / DXD did from dec 2006 to December 2008.

Rebalance is key here. Maybe I did not make this point clear enough. But at some point, one needs to sell the hedge at a profit, or take profits from the long position. That profit can then be converted back to that emergency fund, or reinvested, or whatever.