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Total Posts: 125
Joined: Nov 2005
Posted: 2013-10-24 21:33

I haven't noticed any issues, but I'm not organized enough to monitor expected dividends. I know that short sellers are required to pay any dividends, so I figured I would receive them.

Do you know differently?


Total Posts: 22
Joined: Mar 2010
Posted: 2013-10-25 18:56
That was my assumption as well. I was actually thinking about the classification for tax purposes.

Dividends on borrowed stock will be classified as payments in-lieu of dividends. It creates a tax efficiency issue but won't affect the pre-tax yield.

From IB's description of the service:

"When you lend stocks, you receive the full equivalent of all dividends. However, because you have loaned the stock, the cash you receive "in lieu of" dividends may be taxed as ordinary income instead of at the qualified dividend rate of 15%. IB will try to return shares to you prior to a dividend to reduce or avoid any potential negative tax consequences."


Total Posts: 138
Joined: Jun 2004
Posted: 2014-07-16 23:29
With regard to:

"+ They give you half of the money they earn when short sellers borrow your stocks, it is a few hundred a month, which covers the $20/month fees. "

There is now also the AQS exchange which can access through IB where the take 10% cut of borrow rate you obtain on this exchange, but I have found pretty painful dealing with this exchange through IB for various reasons. Anyone else tried using this feature at IB?


Total Posts: 54
Joined: Sep 2012
Posted: 2014-07-17 02:58
Due to low margin rates would a strategy of 50% spy and 50% tlt with a leverage rate of 1.5 be a sound idea for my personal account? I understand the risks of risk parity. I am asking more in regards to this in a personal account with around 6 figures usd with the margin rates and tax complications. I back tested this with re balancing and my max drawdown is around 25% so why not add cheap leverage...?


Total Posts: 1269
Joined: Jun 2007
Posted: 2017-04-30 12:46
now that the money is piling on I have to reconsider this question Wink.

I lost quite an amount of money over the last years by not investing and just holding cash and doing nothing(given how the large equity indices performed over the last years).

I had an massively overengineered ETF protfolio years ago for some time , which had to be rebalanced monthly and I think was too much hassle and not very well back tested.

Does anybody on this phorum spend any time on his PA? Or is this still considered a waste of time (I tend to think in that direction)?

So buy some ETFs and hope markets don't crash when I retire?

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...


Total Posts: 461
Joined: Jan 2015
Posted: 2017-05-02 22:49
Generating alpha's hard enough. Reliably generating it in your spare time is probably not worth it besides for the preternaturally gifted.

That being said, I don't see why anyone with this phorum's average savvy and sophistication would ignore the major "alternative risk premia". Things like HML, MOM, TSMOM, carry, roll yield, PEAD, BAB, SMB RMW, etc. The type of things that have been known for decades, documented as working across a variety of markets, and have relatively simple implementations freely available at SSRN.

Yeah, going forward they probably won't work as well as they did from 1970-2015. But it'd be pretty shocking if they just disappeared completely. No, they won't turn your PA into Medallion, but even a modest boost to returns has a pretty huge impact over a O(25 year) retirement horizon.

Good questions outrank easy answers. -Paul Samuelson


Total Posts: 838
Joined: Jun 2005
Posted: 2017-05-03 19:57

It would be nice to have some easy set up with the mentioned premias, do you have any suggestions?
I am not sure what you mean by relatively simple implementation, perhaps simpler for "preternaturally gifted"!
It's hard to believe in this day and age there aren't any "modern" ETF's tracking any of these Alternative Risk Premias. The few I found had 2%+ Expense ratios, which would have a "a pretty huge impact over a O(25 year) retirement horizon".


Total Posts: 125
Joined: Sep 2015
Posted: 2017-05-04 02:45

I spend equal time on my PA as I do my day job (nights + weekends).

Why would this be a waste of time? I have been compounding at 50%+ since 2013.


Total Posts: 1269
Joined: Jun 2007
Posted: 2017-05-04 12:36
Well if knew I would compound at 50% I would probably spend more time on it too

Ok..thx for the input. Good to know that it is possible

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...


Total Posts: 125
Joined: Sep 2015
Posted: 2017-05-04 22:39
@Maggette - I would field serious bids for my code.


Total Posts: 361
Joined: Feb 2014
Posted: 2017-05-04 23:17
of course is possible, depends on size i think.

@EspressoLover answer is more suited to big PA'a where having a day job when it's not running your company/companies not makes much sense any more.

but i can be wrong on that as for someone else different things can work.

First Commander of the USS Enterprise


Total Posts: 610
Joined: May 2006
Posted: 2017-05-05 10:26
My view has always been that over the long run, beta is good enough for PA. Except when I am unemployed - trading the PA beats watching daytime TV.

"There is a SIX am?" -- Arthur


Total Posts: 461
Joined: Jan 2015
Posted: 2017-05-05 20:37
> I am not sure what you mean by relatively simple implementation

Obviously I'm not giving this advice to my dentist. But I think if you can 1) program medium-sized scripts, 2) read and understand quant finance papers, and 3) understand the markets with some level of professional intuition, it's not that hard. So, pretty much every NP poster.

If your aim is just to replicate well-known premia, there's a lot of things working in favor of simple implementation:

* You don't have to backtest all. That's already been done for you by the researchers. You just have to construct present-day portfolios.
* That also means you don't have to worry about historical data, and all the associated cost and issues. You only need contemporaneous data, or very recent historical data.
* If a factor's so well known, chances are that it's input data is widely available for cheap or free. Book value, market cap, market beta, earnings calendars, are widely disseminated. Biggest pain in the ass is maybe writing a web-scraper.
* Reconciliation is pretty easy, because the major factors usually have published returns which are frequently updated somewhere (Ken French, AQR, etc.). Just make sure your recent live returns are near in line with some source of truth.
* Turnover on most of the classical premia tends to be pretty low. Most only rebalance monthly, and even then there's usually not much turnover. You don't need a spiffy automated system that continuously trades. Just dump trades at the end of the month, eyeball for correctness and send a batch of orders.
* T-Costs in major developed markets are basically nothing at this horizon. Unless you're very fortunate, your PA doesn't have to worry about market impact.
* In most developed markets, short selling is easy and pretty cheap.
* A typical Decile[1 Minus 10] factor on the Russell 3000, takes positions in 600 names. Obviously that's not feasible. But taking an unbiased subset of 10-15 long and short symbols is going to approximate the portfolio with pretty low variance. Unless you're a major portfolio, 10-15 names is more than enough liquidity.
* Historical performance is well-known. Just apply a sensible shrinkage estimator to expected long-run forward returns. All of the major premia are pretty much orthogonal to each other and the market. So portfolio allocation is dead-simple.
* The exact details of most factors are pretty meaningless. They're pretty much just Schelling points, decided by the arbitrary decisions of the first academic to publish on the topic. These aren't ultra-fragile strategies that require precise execution. So even if your implementation gets a few details wrong by accident or necessity, it's unlikely to have a significant impact.

The biggest challenge is just being disciplined. When a factor under-performs for five years, that's sixty rebalances of bad vibes. There's a strong psychological impulse to abandon it (which is a large part of why these things tend to keep working). There's also the temptation to tinker. "Oh, well it seems like [X] doesn't work when [Y], so I'm going to add this modifier or filter". But once you do start doing that, you're now trying to generate alpha. All those simplifying conditions go out the window, and unless it's your full time job, it's probably not going to work out well for you.

Good questions outrank easy answers. -Paul Samuelson


Total Posts: 40
Joined: Jul 2008
Posted: 2017-05-06 06:37
Eq smart beta / alt premia strategies are quite readily available nowadays in even ETF form, albeit long only. diy l/s has some potentially unpleasant / time consuming aspects though (corporate actions, so annoying). I have for several years traded a watered down versions of my futures strategies using ETFs (sadly can't trade futures in PA). 30 or so ETFs, borrow costs can sometimes suck but hey, half of a 2.5 sharpe strategy is still decent for PA


Total Posts: 254
Joined: Dec 2010
Posted: 2017-05-07 00:11
EL, I think your proposal sounds a bit like you are trying to compute a Fourier series of a function, but you don't know the coefficients at all and you only know sines and cosines very approximately, yet you somehow hope that you are going to get a good approximation to the function. Get real!


Total Posts: 1269
Joined: Jun 2007
Posted: 2017-05-07 20:58

Now let's assume I do have strategy with a sharp 1.5 plus....(well, very hand waving with calculation\estimation of transaction costs...but shouldn't be critical here)

Rebalanced monthly. Based on a set of 26 ETFs. Basicaly a diversified momentum thingy.

My problem is: I am reluctant to invest a significant percentag of my money only in ETFs. Everything that growths that massiveley in size like the invested volume in ETFs scares me.

What I mean, my invetsment strategy appears to be quite "market neutral" if you take a major equity index as "market".

I am worried that the diversification/hedging effect of the strategy (short ETFs, ETFs on asset classes) breaks down if markets crash and the ETF industry (not the equity ETFs...) with it?

Any thoughts on that? Or is it possible to detect things like a priori that an stay on the sidelines?

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...


Total Posts: 610
Joined: May 2006
Posted: 2017-05-08 11:57

The short answer is that nobody knows because it hasn't happened yet. Some people have some theories (e.g. benefits of sticking with physical etfs vs synthetic etfs etc) but the reality is that that won't help all that much if liquidity dries up like it did in 2008. Correlations also all break down when everybody rushes for the exit.

So you are left with the strategy for any crash - keep your leverage low going into the crash, and high coming out of it.

A bigger worry would be the cost of shorting your etfs. That's what kills market neutral etf strategies most of the time.

"There is a SIX am?" -- Arthur


Total Posts: 75
Joined: Nov 2010
Posted: 2017-05-08 15:43
I haven't looked into it in detail, but has anybody calculated the effects of US taxes on some person strategy like what EspressoLover suggests?

1) Assuming the bulk of your portfolio is not in tax deferred accounts, the turnover is subject to short term capital gains, or even long term capital gains can knock 10-20% off your profits each year. If you are only squeezing out 12%, the taxes could drop it to 9%. then maybe it is not a win.

2) If you are doing it in Tax-deferred, no shorting. Also, you have to wait for funds to settle before trying again. That keeps you out of the market for 10% of the month. Is that worth it?

Are we benchmarking against the 8% gains of the S&P and hold it for 30 years and paying taxes only on dividends?


Total Posts: 461
Joined: Jan 2015
Posted: 2017-05-09 03:50

Good questions. This paper has a deeper dive into the tax efficiency of the major equity anomalies.

The major "fundamental anomalies" have pretty low turnover. On the order of 17% per year, which doesn't put it that far away from the S&P 500. On the short leg, you pay ordinary rate, even if you hold for over 12 months, so they're not quite as tax efficient as S&P500. OTOH, most of these anomalies accrue almost all their gains on the long leg (which makes sense, as the market rises over time).

The "trading anomalies" also aren't as tax-bad as they seem at first glance. The turnover's high. But most tend to generate substantial tax-loss realizations. E.g. MOM is repeatedly selling losers and buying winners. Not only does this tend to defer tax realization and concentrate gains in 20% long-terms cap-gains, but it generates very valuable short-term tax loss carry-forwards which can be used in other parts of your portfolio.

Futures and forex are taxed at a blended rate of 28% regardless of holding period. Implementing an anomaly in commodities, rates or FX space (e.g. TSMOM or carry) means that even a tax-naive strategy is still relatively efficient. Futures, even shorts, can be utilized in an IRA. So, for example if you want HML in an IRA, you can buy the long equity leg, then beta-neutralize using ES. The research indicates that the single leg still generates sizable returns for most anomalies. The low-turnover anomalies would only be minimally affected by the 3-day waiting period.

Finally, if you're not liquidity constrained, and using random subsets as approximating portfolios, there's potential tax efficiencies with modest bias-free modifications. Tax losses can be realized and gains deferred by re-sampling on the losing leg. E.g. if the market is up for the year, pick a new subset on the short leg, and keep the subset for the long leg.

Good questions outrank easy answers. -Paul Samuelson


Total Posts: 115
Joined: Apr 2018
Posted: 2019-07-03 17:54
I'm trying replicate AQR factors with ETFs, but can't make sense of the data.

For example, I expect HML can be replicated by a value ETF like VLUE, or QMJ by QUAL. But the returns look totally different. Guessing this is because the factors are beta hedged, whereas the ETFs are intrinsically long.

What's an easy way to map the factor exposures to ETFs?


Total Posts: 1670
Joined: Jun 2004
Posted: 2019-07-04 00:07
Along the lines of alternative premia, selling vol is a reasonable strategy as long as you don't go overboard. I'd even think that selling puts over the long run will outperform being long equities.

PS. I am sitting on a large pile of cash at the moment, so thank you for reviving this thread!

'Progress just means bad things happen faster.’


Total Posts: 115
Joined: Apr 2018
Posted: 2019-07-04 02:44
@strange, how do you prevent blow up like XIV when selling vol?


Total Posts: 1670
Joined: Jun 2004
Posted: 2019-07-04 13:52
XIV blew up due to the excessive leverage, it was not really vol related. If you do something less leveraged like selling puts with a large cash cushion, selling vol is fairly safe. For example, the PUT index had it's biggest drawdown in 2008 (-22% and it recovered quicker) with an average return of about 6.5% p/a. All it does is sell cash secured puts. Replicating that "strategy" on other equity indices yields similar results, even for the indices that did not go up as much historically (e.g. NKY or Stoxx).

'Progress just means bad things happen faster.’


Total Posts: 30
Joined: May 2016
Posted: 2019-07-04 15:47
Not too useful in a portfolio sense though because it is correlated to equities itself. When shit hits the fan, it will hit them both at the same time. Not to mention the inferior tax treatment compared to buy and hold.


Total Posts: 79
Joined: May 2010
Posted: 2019-07-04 15:49
@Strange, I was looking at WisdomTree CBOE S&P 500 PutWrite Strategy Fund and I see the following performance results:

Did not look at volatility and risk-adjusted performance yet, but overall MSCI USA Large Cap Index seems to perform better over the long run?

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