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On 2016-03-25 at 3:56 PM, explo said:

I've calculated the individual return, max drawdown and volatility from the individual stocks asset class and the combined (stock funds and hedge funds together) funds asset classes to see if one of the classes is inferior in its risk adjusted return contribution to the portfolio.

Note that the funds asset classes have 11.5 times higher allocation than the individual stocks, so equal return, max drawdown and volatility performance would mean that the funds contribute 11.5 times more of that to the portfolio than the individual stocks do. If my picks and trading are successful maybe the individual stocks can perform better than the funds.

Note that the individual risk contributions cannot just be summed up or multiplied. The combo is supposed to have better risk properties (from diversification effect) than the sum of parts. For the return the combo equals the parts multiplied.

The strategy description post above has been updated to show these individual contributions.

I've stopped posting the return, max drawdown and volatility separated for stocks and funds. Instead I've separated out 2 other components of the portfolio return, the interest expense and the tax expense. These non-asset specific components were previously included in the stocks and funds returns by their asset size proportion. I think breaking them out gives a better picture of the stocks and funds actual contribution to the portfolio return as the relative allocation of asset classes is not affected by the amount of leverage chosen and thus the return difference between the stocks and funds should not reflect the amount of leverage used.

So instead of tracking these now 4 portfolio components in daily updates in the "About Me" tab in my profile (it becomes to messy with too many numbers) I'll just include them in the quarterly updated performance charts. In these performance charts I will also show the unlevered return of the portfolio. The levered return equals 4 times (this is the leverage factor) the sum of the unlevered return contributions from the stocks, funds and tax expense components plus the negative return contribution from the interest expense.

The charts to date for the 16H1 view have been attached. For now the asset returns are not even covering the negative return from the interest and tax expense. The funds being 11.5 times larger in asset size than the stocks is expected to return 34% on average annually and the stocks only 3% annually with equal asset return requirements. This would cover the interest and tax expenses and leave a net 30% annual portfolio return.

So far the portfolio is performing below expectation on return, but as expected on risk. The unlevered portfolio has much less risk than the stock index (not to mention the high beta ETF) and the leverage effect seem to put the levered portfolio on the same order of volatility and drawdown risk as the stock market index. This is as intended although the portfolio is long-term expected to have 50% more volatility than the stock market index but only half the drawdown risk of the stock market index.

It is too early to evaluate the strategy now though, but could still be interesting to follow.

16H1_return.PNG

Edited by explo

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5 hours ago, explo said:

is expected to return 34% on average annually

what fund are you investing in to get that expected return?

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29 minutes ago, disdaniel said:

what fund are you investing in to get that expected return?

Mainly local ones. As described in my profile the asset value of the funds are 345% of the portfolio capital, while the stocks' asset value is only 30% of the portfolio capital (11.5 times lower). Thus if both stocks and funds would achieve my 10% average unlevered return on assets requirement (needed to achieve my 30% levered return on capital goal) they would contribute 3% and 34.5% return on portfolio capital respectively and the interest and tax components would contribute -6% and -1.5% respectively for a total of 30% levered return on portfolio capital. The benefit of the funds (dominantly hedge funds) is more in the low risk (enabling the high leverage) than in high return.

The funds I use have a historical average return closer to 11% than 10%, so from a historical perspective the 10% return requirement is reasonable for the funds. For stock markets however the long-term index gains tends to be around 7%. To get to a 10% long-term average one would have to be very successful in beating the market, but 7% does not include reinvested dividends. If that's included (which is the fair measure of long-term average return on stocks) the long-term average return on stocks gets close to 10%. Then with active trading effort there is further potential to add trading gains if successful in trading, thus not really requiring to beat the market in stock picks, just to be close to par with a broad index.

Edited by explo

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2 minutes ago, explo said:

The benefit of the funds (dominantly hedge funds) is more in the low risk (enabling the high leverage) than in high return

You are losing me here...how can 34% expected return be considered low risk?

Or are you saying that both stocks and funds have 10% expected return, and then you leverage that (initially low risk fund return) up?

 

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7 minutes ago, disdaniel said:

You are losing me here...how can 34% expected return be considered low risk?

34% is achieved through high leverage. High leverage requires low risk. The funds I use have low risk and thus allow high leverage and thus enables high levered return. What's special about them is not super return, but good return at super low risk. Like you say here:

7 minutes ago, disdaniel said:

Or are you saying that both stocks and funds have 10% expected return, and then you leverage that (initially low risk fund return) up?

Edited by explo

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I think I get it now.  For every $100 you put in the account, you buy $30 of stock and $345 of funds because you are allowed to borrow money to buy the low risk funds.

Never mind doing dd on the individual stocks, you better be damn sure you know what your "low risk" hedge funds are doing...imo

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Explo, Under this low interest environment, the 10 to 11% low risk seems very good. 

I am sure that you are aware of some Ponzi scheme peer to peer lending that happened in China that caused almost 1 million people to lose their money.  This scheme also gave people who lend money around 10% return.  The funds make up fake project to borrow money. 

Please be careful.

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18 minutes ago, disdaniel said:

I think I get it now.  For every $100 you put in the account, you buy $30 of stock and $345 of funds because you are allowed to borrow money to buy the low risk funds.

Never mind doing dd on the individual stocks, you better be damn sure you know what your "low risk" hedge funds are doing...imo

Yes. The credit mechanism from my broker is complicated, but I've set things up to view it more simply:

If I put $100 in my account I borrow another $300 from my broker, then I reserve $25 for cash buffer, use $30 to buy stocks and the remaining $345 to buy funds.

Due to much lower inherent volatility of and correlation between the funds in the funds basket than the stocks in the stocks basket the return volatility (deviations from average) of the funds basket in absolute dollar is only slightly larger than it is for the stocks while the expected average return of funds basket is size proportionally larger (11.5 times) than the expected average return of the stocks basket.

This can be seen in my chart as the amplitude of swings for the funds return on portfolio capital is only slightly larger than for the stocks. While the average return is not yet proving to be 11.5 times higher for the funds than the stocks. But the average return for them need to get positive first before that comparison becomes meaningful. Ideally one needs to view it over a full economic cycle of maybe 10 years to include both a crash and a recovery period for the stocks.

 

Edited by explo

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Expo, if you are being offered "low-risk" 10% returns you are being taken for a ride. I don't know how else to put it, as I know you have a very solid financial head on your shoulders. With negative interest rates in several major countries and US 10-year rates at 1.72%, I would be very skeptical of any low-risk investments that return 10%. Here in San Diego investors continue to pile into real estate driving CAP rates below 4% for hot properties. Many of us thought that yeildcos provided low-risk returns over 10%, only to be very quickly proven wrong. 

Expecting a 10% return is inline with S&P long term averages if dividends are reinvested though. Personally I would be very cautious maintaining a 3.5:1 leverage ratio though as one unexpected crash can wipe you out, but I know you fully understand what you are doing. Any long time member of the solar investor scene has seen the number of option players come and go as making the wrong leveraged bet can make you broke just as fast as making the right one can make you rich.  

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35 minutes ago, BIPV Investor said:

Expo, if you are being offered "low-risk" 10% returns you are being taken for a ride. I don't know how else to put it, as I know you have a very solid financial head on your shoulders. With negative interest rates in several major countries and US 10-year rates at 1.72%, I would be very skeptical of any low-risk investments that return 10%. Here in San Diego investors continue to pile into real estate driving CAP rates below 4% for hot properties. Many of us thought that yeildcos provided low-risk returns over 10%, only to be very quickly proven wrong. 

Expecting a 10% return is inline with S&P long term averages if dividends are reinvested though. Personally I would be very cautious maintaining a 3.5:1 leverage ratio though as one unexpected crash can wipe you out, but I know you fully understand what you are doing. Any long time member of the solar investor scene has seen the number of option players come and go as making the wrong leveraged bet can make you broke just as fast as making the right one can make you rich.  

The much lower risk is in terms of max drawdown which is relevant to the risk of leverage. The normal risk concept of volatility (which is relevant to IRR impacting investment timing risk) is also lower than stocks, but not that much for some individual funds. Both types of risk are significantly lower in the basket than individually due to low correlation between the funds while different stocks usually have high correlation (to market and thus eachother) through their positive beta, especially in down periods, making it hard to reduce max drawdown in a stocks basket a lot through diversification.

The youngest fund is 12 years old and the oldest one 18 years. They all achieved the above 10% average return since inception and experienced very low drawdown during 2001 and 2008 market crashes. Their max drawdowns are between 10-15% (stock index max drawdown is above 50%) and the basket would have had less than half of that. Thus the leverage holds in historic simulation. Future not repeating history might break the strategy though. I think the risk that the future return will be much lower than historic is much bigger than that future risk will be much larger than historic, but it only takes one new record negative event to blow up the portfolio and more. Only one very low risk fund expose more than 100% of the portfolio capital. 

I guess I'm the SUNE or LDK of investing. I just hope that I'm smarter than those guys in how I apply my leverage. The idea is that my risk level should be much lower with my new strategy than the old one. But I can understand that combining this with much higher return expectation than achieved with old strategy as well might sound too optimistic.

Edited by explo

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21 minutes ago, explo said:

The much lower risk is in terms of max drawdown which is relevant to the risk of leverage. The normal risk concept of volatility (which is relevant to IRR impacting investment timing risk) is also lower than stocks, but not that much for some individual funds. Both types of risk are significantly lower in the basket than individually due to low correlation between the funds while different stocks usually have high correlation (to market and thus eachother) through their positive beta, especially in down periods, making it hard to reduce max drawdown in a stocks basket a lot through diversification.

The youngest fund is 12 years old and the oldest one 18 years. They all achieved the above 10% average return since inception and experienced very low drawdown during 2001 and 2008 market crashes. Their max drawdowns are between 10-15% (stock index max drawdown is above 50%) and the basket would have had less than half of that. Thus the leverage holds in historic simulation. Future not repeating history might break the strategy though. I think the risk that the future return will be much lower than historic is much bigger than that future risk will be much larger than historic, but it only takes one new record negative event to blow up the portfolio and more. Only one very low risk fund expose more than 100% of the portfolio capital. 

 

Really they only had max drawdowns of 10-15% during the 2008 crash? Call me skeptical as expect for real estate in Palo Alto and Monaco, I can think of few assets, much less an entire asset classes, that only showed a 10-15% drawdown during the crash. Are they heavy government debt as that asset has had a massive boom over the past 10 years with yields falling from over 5% in 2006 to 1.7% now. Not sure how much further this trend can continue.

Either way, a 15% drawdown at 3.5:1 leverage is an over 50% loss of invested capital which really equivalent to a monthly swing in holding solar shares so I guess we're all accustomed to that level of volatility. 

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24 minutes ago, BIPV Investor said:

Really they only had max drawdowns of 10-15% during the 2008 crash? Call me skeptical as expect for real estate in Palo Alto and Monaco, I can think of few assets, much less an entire asset classes, that only showed a 10-15% drawdown during the crash. Are they heavy government debt as that asset has had a massive boom over the past 10 years with yields falling from over 5% in 2006 to 1.7% now. Not sure how much further this trend can continue.

Either way, a 15% drawdown at 3.5:1 leverage is an over 50% loss of invested capital which really equivalent to a monthly swing in holding solar shares so I guess we're all accustomed to that level of volatility. 

15% MDD is for individual funds. The basket (2008 included but not 2001) is around 7%.

The strategies are different and these are the cherries picked from vetting hundreds of funds (already vetted by broker). Almost all hedge funds are crap.

 

Edited by explo

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My numbers look rather weak. My accounts are without leverage and are fully funded. One-year is around 34% down. My 3-year is 57%, and 5-year is about 14%. Despite using a discount broker, my trading cost is 11K in commissions in five years.

The bottom line is I am only riding my 2013 results, and I am riding them down. Solar has been bad for me for last two years and this year.

I need a double somewhere. I thought that was going to be TERP, but it became the biggest hit of this year. My choices will be JKS, CSIQ, FLSR and for now PEGI.  I may go out outside of the barn and look for value, but I got, to be honest, it is not comfortable after focusing only on solar for such a long time.

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12 hours ago, odyd said:

My numbers look rather weak. My accounts are without leverage and are fully funded. One-year is around 34% down. My 3-year is 57%, and 5-year is about 14%.

 

I've been more lucky to have my more than 200% gain in 2013 preserved with only a 5% loss in 2014 and then extended with 35% in 2015, but this was with old concentration strategy and luck.

Attached below is the development of JASO and the USD gain on the Euro during 2014 and 2015. Those two were my dominating exposures and JASO helped keeping me flat while the USD helped lifting me 30% for a total effect of +30% for the two years.

JASO+USD.PNG

12 hours ago, odyd said:

Despite using a discount broker, my trading cost is 11K in commissions in five years.

My current trading fees annual cost run-rate is around 0.6% of portfolio capital and then there's around equally big forex fees cost of 0.7% annually (since all my trades are in foreign currency and my account only allows local currency thus each stock trade cause an implicit currency trade too). Each of these are less than half of my current tax cost run-rate of 1.6% annually, which in turn is less than a third of my current interest cost run-rate of 5.8% annually. Tax and interest cost I account for separately, while trading fees, forex fees and forex losses/gains are included as part of the return on the security they occurred for.

12 hours ago, odyd said:

I need a double somewhere.

This is how my old strategy (not much of a strategy rather an investment style) worked. I needed a big 2013 to recover a bad 2011 and 2012 and it was possible by high exposure to high beta stocks.

Now after exiting that old strategy at the opportunity of lucky forex gain in 2015 a 2013 repeat is no longer possible. In the chart attached below I've applied my current allocation strategy to historic data to see the monthly sampled annual (AR) and quarterly (QR) return distribution for the last 10 years.

return_distribution.PNG

As can be seen up to 100% annual return happened in rare case, but there's nothing beyond that. What's more interesting to me is the average around 30% and the minimum of -15%. The quarterly distribution is more narrow, but also can be more negative. This is because good hedge funds usually have short memory and quickly recover negative return.

I realize that this distribution looks to good to be true, but it is an after the fact pick and the future distribution will likely not be as good, but tuning based on best track record and only achieving something close to that would be good. I view it as there is a buffer for worse performance. If the bar is set at 30% average returns over time at low risk, maybe 20% average returns can be realized or at least poor returns or losses over time can be avoided.

For the first quarter on record for the new portfolio strategy it returned roughly -5.5% after deducting -1.1% in startup cost for fund purchase fees. So that's in the left range of expected quarterly returns. If I stay there for the other 3 quarters of the year the expectation of historic return distributions to roughly repeat will be concluded flawed.

 

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I just find it is hard to make money in the current environment. It was easy to understand the 2013 numbers. The industry recovery was a lot more visible but did not reflect that in stock prices. Both years had beautiful bottoms and relatively high tops, but I did not do a good job on riding them. I also had disaster meeting with options one of those years wiping out almost everything in one account.

In the time of confusion, it is nice to rely on some income stocks and TERP was the ticket here, and SUNE ruined it for me. I am in PEGI now to see if this can be that place. I do want income, but nothing crazy, and the potential for equity growth is there as well, as they become a larger business, this year.

What I need to do is to stop trading. I trade way to many times. I need to be more disciplined and wait for an entry point and also ride for longer when I do. I should know what fluctuation is by now.

 

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1 hour ago, lepv123 said:

Is TERP too dangerous to come in now?

The situation with TERP did not improve from my sale on March 16th. The price is about the same, while Tepper bought more. TERP is being sued for the First Wind. SUNE has not reported. The dividend is an unknown, bankruptcy impacts are unknown. Yes, I think it is dangerous to buy back, as it may go down before it goes up. There will be moves up, but it is hard predict anything about this stock right now. This is is why the risk is more than award.

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I hope this is just a temporary situation. The fact that Tepper bought more bodes well for TERP's future. I can't imagine TERP sinking to the $6s, but if so, that would be a great time to go in for sure.

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I find nothing assuring about $6 per share. Would you consider if dividend was cancelled to pay $6 as a value?

If I know bankruptcy process and how affects yieldcos here in the US, I would consider it. Tepper's buying at this point does not make a lot of difference. Einhorn was buying SUNE and what happened to him?

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3 hours ago, odyd said:

What I need to do is to stop trading. I trade way to many times. I need to be more disciplined and wait for an entry point and also ride for longer when I do. I should know what fluctuation is by now.

 

To trade or not to trade that is the question. I find these stocks hard to predict and moving a lot without a clear direction. I think "smart" trading them hard, meaning it is hard to trade them based near term future direction guess ("it seems to be appreciated by the market now, that will likely continue") as the market just tend to jerk them around a lot. This makes dumb trading easier and profitable ("it's low again, time to buy, it's high again time to sell"). A strict scheme to eliminate psycology ("it's high now, maybe it's better than we thought, i'll hold it longer" and vice versa) works best for me as long as these names move without clear direction.

Edited by explo

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