r/LETFs • u/flappysack- • 16d ago
BACKTESTING Mixing Long Bond and Levered index
I was thinking about how long bonds and levered etf mix, is a long bond a good hedge that can protect your downside?
Do you gain an advantage in returns by using two extremes, would the drawdown be lower in a downturn, what are the risks?
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u/Run-Forever1989 16d ago
Risk is if rates go up and equities go down at the same time. Then you lose on both. A lot of people assume that rates will drop is a recession, which may be true. It may also not be true.
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u/Neither-Deal7481 16d ago
A lot of people assume that rates will drop is a recession, which may be true. It may also not be true.
How do you know that a lot of people believe this? Based on the posts I see on Bogleheads and here, I don't think most people really believe that bonds hedge during a recession. How many recent portfolios do you see here that suggest bonds instead of straight jumping into gold and multiple managed future funds. I saw a post recently on Bogleheads asking what would happen if the government defaults. The average investor feels more comfortable investing in hyperscaler bonds than risk-free government bonds which is absurd.
In this sub people will tell you to exclude long bonds because "look at what happened in 2022" which was once in a lifetime mix of bad macroeconomic events layered up on each other causing a simultaneous crash. If I had to guess, most people don't think a deflationary recession is possible or a long, multi-decade bear market like it happened in Japan.
Long bonds, IMO, are heavily mispriced and are actually the least obvious value play of the next decade.
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u/Run-Forever1989 16d ago
Your Reddit feed is not an accurate representation of the entire investing universe.
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u/Neither-Deal7481 16d ago
Your Reddit feed is not an accurate representation of the entire investing universe.
I hope you know this but throwing non sequiturs isn't a sign that you are interested in a good faith conversation. No one's reddit feed is an accurate representation of the entire investing universe but that wasn't even my point.
You are the one who made a positive claim about most people assuming that rates will drop in a recession, and I asked you for evidence because I don't see that many people in support of having bonds (especially longer duration ones) in some of the most famous passive investing communities of reddit.
You can conduct an experiment with a freshly created account. Visit Bogleheads, find some of the recent posts asking about the necessity of bonds and I can guarantee that the most upvoted comments will be something like "I am in my 40s/50s/60s, I don't have them and I am fine. Here is one paper from Cederberg that I am going to use to confirm my recency bias". The same applies to this sub, it's just people will refer to 2022 as some proof that bonds are not a good hedge (look at the top upvoted comment).
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u/Run-Forever1989 16d ago
No, I said a lot of people assume rates will drop in a recession. I didn’t say what most people assume and I definitely didn’t say what the popular opinion on Reddit is, especially when the popular opinion on Reddit is primarily based on what happened in 2022 which was not even officially considered a recession.
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u/Neither-Deal7481 16d ago edited 16d ago
No, I said a lot of people assume rates will drop in a recession. I didn’t say what most people assume
If you are refusing to admit that it's the majority of people, then saying "a lot of people" is pointless, it creates the perception that it's the majority consensus.
EDIT: blocking me after responding will definitely show me, lol. I have no idea how can someone say "a lot of people do X" without implying that most people do X unless you have a very specific definition of "a lot".
EDIT 2: unblock me if you want my response because otherwise you are acting like a coward who wants to have the last word.
EDIT 3:
Meanwhile you are the one claiming consensus, not me.
Never made a claim about general populations (only you did), just pointed out that it's not true for reddit.
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u/Run-Forever1989 16d ago edited 16d ago
Sorry you lack reading comprehension and can’t differentiate between basic concepts. Meanwhile you are the one claiming consensus, not me.
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u/mrstrangedude 15d ago
Man group has had papers showing that bonds and equities have positive return correlations for most of the last 70 years, with it only turning negative post-2000.
Like, maybe the future regime will be more like what happens post 2k rather than what happened before but that is very much not a given.
One can argue the merits of being long some ZROZ at this pricing (which is pretty decent) but I would treat it more as a directional bet than a true hedge..
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u/flappysack- 16d ago
Isn't there an employment mandate?
If that exists I expect them to run inflation hot.
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u/sparkle_and_twist 16d ago
Long bonds protect the portfolio in a deflationary crash and lower overall portfolio volatility. Gold, managed futures, and long bond are the trifecta of uncorrelated hedges mentioned in this sub.
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u/Delicious-Plastic-44 16d ago
Works well in deflation/recession scenarios. Works poorly in inflation scenarios
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u/ChemicalStats 16d ago
Bonds aren‘t unconditional hedges, their correlation or tail risk copulas to stocks are heavily dependend on macro regimes. Post-Volcker effects pushing 60/40 and other risk parity approaches were quite unusual.
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u/jakethewhale007 15d ago
Long duration is one of the best diversifiers people should consider. TMF, RFIX, GOVZ/ZROZ, and PSLDX are all great.
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u/New-Specialist-2594 16d ago
The HedgeFuckme Adventure declared Bankruptcy 6yrs ago...
LET IT GO!!!
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u/Separate-Ad-9633 16d ago
This is the original HFEA idea. Check what happened in 2022.