Posted on

Avoid Market Drawdown!

The TMV ETF should stay in place for quite some long time, and it´s a great investment to harvest time decay and avoid drawdown. The big tapering drawdowns of 2013 are past history. You don’t need to look daily at the TMV short hedge. Just keep it. The ETF TMV is a loser and if you stay short it will be a long term winner. It should return about 10-15% per year.

I came across the following yesterday on Logical Invests website:

Avoid Market Drawdown

I’m afraid there has been an error here.  The real figure for the example quoted in a CAGR of around 8.4% not 10 to 15%.

This is because Frank has not taken into account the necessity of maintaining  a constant ratio of short x 1 the instrument concerned. If all you do is to short on day 1 in 2009 and simply maintain that same short until today the profit will simply be the decline in the adjusted short price of $285 to the current price of $18. If you want to obtain the figures quoted you will need to look at your position each day and make adjustments each day to maintain a constant 1x short position.  Then indeed you can achieve the sort of figures quoted.

But for my money the effort is not worthwhile – you can achieve much the same simply remaining long. And then you really can just buy and hold. No daily adjustments necessary, no borrowing costs, no effort.

I like the Logical Invest website very much and they are doing a good job in keeping folk out of the hands of discretionary fund managers so I hope they will not mind me pointing out their mistake!

I don’t like using short histories so instead of using ETFs I used the US 20 Year bond futures. I did not include interest on money not needed for margin, nevertheless the figures are accurate enough to illustrate my point. Have a look at the figures and charts below.


dd us20Yr


Here are the figures for the LONG side:

1 x US 20 Year Bond
1985-01-02 -26.51444365
2017-06-20 156.40625
CAGR 5.62%
Std Dev 10.27%
Max DD -21.56%
2 x US 20 Year Bond
1985-01-02 -26.51444365
2017-06-20 655.1533969
CAGR 10.38%
Std Dev 20.53%
Max DD -40.30%
3 x US 20 Year Bond
1985-01-11 -26.83452635
2017-06-20 1947.883671
CAGR 14.11%
Std Dev 30.81%
Max DD -56.15%


Here are the figures if you short the 3 x Long on day one and simply hold:

1985-01-02 -26.5144
2017-06-20 53.0288
CAGR 2.16%


If instead you had shorted and maintained a short ratio of 1 x the 3 x Long you would have achieved around the same as the long position: 14%  ….give or take…..


Leave a Reply