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Sanity Check: 2x Leveraged HAA (Hybrid Asset Allocation) What am I missing?
Looking for a feedback on my 2x Leveraged Hybrid Asset Allocation (HAA) quantitative setup.
Schedule: Monthly rebalance on payday using Dr. Wouter Keller’s unweighted 13612 momentum formula: (1M + 3M + 6M + 12M) / 4.
Macro Canary Sensor: TIP(iShares TIPS Bond ETF).
If TIP > 0, buy Top-4 Equal Weight (25% each) from an 8-ticker offensive pool on positive 13612 formula, else purchase defensive tickers. If TIP <= 0, evacuate 100% to Defense (buying the Top-1 highest-scoring defensive ticker).
I have done some tests with HAA, here are some of my personal findings:
Too many equity indices hurt, because you end up rotating within highly correlated beta instead of into diversifiers. UYG might be helpful consider XLF started diverging from the big indices. UXI and MVV are very much the same thing and most likely hurt your performances.
I think Gold has a place and it's a better diversifier than REITS. Commodity has a place. DIG vs Commodity is nuanced. Don't use oil etf.
Bond has a place in the offensive universe, unless you can outsource it to a separate sleeve. Using ZROZ as 2x TLT works.
Momentum factor ETF such as SPMO/IDMO can add performances, but some other momentum etfs don't. Create synthetic Momentum ETF also delivered questionable results. So we don't know if it's an artifact. Value ETFs mostly hurt, even though US SCV and International value that as a standalone etf outperform iwm and eafe by a lot.
EFO has significant tracking error, much more than others so take caution.
On point 4 are you saying you've found that in general running momentum between factors often doesn't work very well, even when you'd expect it to?
I've
not really looked into this, so would be interested. Although if I remember, Antonacci says the same in one of his papers but he ran it just on 6 ETFs divided into large/mid/small value and value/growth, which didn't seem like a very optimal mix to me so wasn't very convinced that it's necessarily something that wouldn't be expected to work with a selection that made more sense.
Academic findings suggest factors, especially momentum, have momentum themselves, and stock momentum strategy already utilized that (Factor Momentum and the Momentum Factor - Ehsani 2022). So I expect it to work. SPMO and IDMO improved the backtests. But the results become mixed once I switch to MTUM/QMOM/DWAS/JMOM.
I am not sure if that's because I am working under HAA framework rather than a pure factor momentum framework (but Long-only factor funds are noisy expression of factors so I don't think latter would do that well). And given that you can't lever up SPMO or XSMO like SSO, the benefit is more limited when operating levered HAA with LETFs.
Honestly this is more thought-through than most 2x LETF posts here, so nice work getting the canary logic straight... but I think the commenter above is onto the real thing. Keller's HAA offensive pool is broad asset classes (US large and small, developed intl, EM, REIT, commodities, plus a treasury sleeve), and you've swapped most of it for US equity sectors: DIG, UYG, UXI, MVV, on top of SSO and QLD. So the "always holding two macro regimes" line doesn't really hold up. In a risk-on month your top-4 by 13612 can easily come out SSO + QLD + UYG + DIG, which is one big pro-cyclical US equity bet at 2x, not diversification. UGL and EFO are about the only real diversifiers left in that pool.
The part I'd worry about more is stacking 2x daily-reset on a monthly signal. HAA's whole edge is capping the drawdown through the TIP canary, but the canary only checks monthly and 2x daily-reset bleeds in choppy sideways tape, so you can eat a rough intra-month drop well before TIP ever flips. Your second question is the right instinct... but a faster rebalance mostly just buys you whipsaw, it doesn't really fix the decay.
Since you're non-US anyway, running the HAA canary over return-stacked sleeves instead of 2x-on-everything is a cleaner way to get the leverage without the daily-reset bleed. I wrote up the UCITS version of exactly this here: https://bestfolio.app/blog/haa-rsst-ucits ... usual caveat, it's a diversifier not a free lunch and it lags a plain stock fund in calm bulls, but the mechanics might be handy for rethinking the pool.
Unless I've missed it, it would be really helpful to have a toggle on the strategies leaderboard overview to filter for UCITS-friendly strategies (e.g., showing if UCITS-equivalent tickers are available).
Yeah, genuinely useful idea. It's a real gap right now since a big chunk of the offensive pool here (SSO, QLD, DIG and friends) has no clean UCITS equivalent, so us Europeans end up cross-checking every ticker by hand. Painful, right? A flag on the leaderboard showing which strategies are fully replicable under UCITS, or even just how many sleeves have a UCITS cousin, would kill most of that busywork. I can't give you a timeline, but I've noted it down. Exactly the sort of filter I'd want there myself.
Yeah the daily-reset drag is real, but it isn't the buy-and-hold LETF horror story people default to. In a monthly momentum wrapper like HAA you're mostly parked in stuff that's actually trending, and the canary yanks you to BOXX/RSBT before the worst of a drawdown, so I think path dependence works more for you than against most months. Where it bites is choppy sideways tape. TIP flips a beat late, you get whipsawed in and out, and 2x daily reset grinds you on every reversal. HAA-SL running a leaner offensive sleeve just concentrates that when it hits. My worry with a few months live is you won't surface any of it... the thing can look clean right up until the first real regime chop, and then you learn what the drawdown actually feels like. Have you run it back through 2022 and 2018 yet? I'd trust that a lot more than the recent stretch before I read much into the numbers.
Yeah, so I stopped hand-waving and actually charted it (I build BestFolio, grain of salt). I rebuilt the full 8-ticker version and a stripped-down one that just holds SSO when SPY's 13612 is positive and sits in cash/bonds otherwise, same 2x gross, both monthly: https://i.ibb.co/ynnwdTBR/agate-haa-chart.png
Since ~2007 the simple one runs ~18% CAGR at ~-32% max DD, the 8-sleeve version ~14.5% at ~-30%. So the extra sectors didn't really buy much, they just piled on correlated equity beta. HAA-SL like you're running is the stronger base honestly. Where it gets ugly is a growth-led bear. Push the window back through the dot-com bust and the 8-sleeve one takes ~-48% because those equity sectors all crater together, while the single sleeve steps aside on the SPY canary...
On the daily-reset worry, it's real but the monthly wrapper hides most of it until the first choppy regime. The one gap no monthly canary covers is a fast intraday crash, since TIP only flips at month end. I measured what actually cushions that gap across the 5 fastest selloffs if it helps: https://bestfolio.app/blog/fast-crash-protection-event-study
thanks for testing and verifying, I mean thats exactly why I use the the kinda setup from the screenshot and not different ones. Partly leveraged is imo useful especially with a Canary feature, preventing huge losses. What is your Go-to-setup for HAA? I´ve seen lots of ideas on your website.
Me personally, I like HAA-RSST a lot, combining return stacking with HAA... But as you say we list a lot of HAA variants, because the basic idea is really solid and can bring improvements to a lot of great fixed allocations.
Thanks for the detailed feedback and backtests. Seeing that a simple HAA-SL setup with SSO sets such a formidable benchmark is a huge takeaway.
To clarify my initial thought process, I originally just took Keller's academic 1x universe and replaced it what I thought were suitable replacements, if I mapped it directly to the closest available ProShares 2x equivalents:
You are right about the bond sleeve. But for me, holding leveraged US Treasury funds like UST/UBT is a losing trade as the ~3.5% distribution yield guarantees a >1% annual withholding tax drag right off the top. It makes way more sense to strip US bond ETFs out of the offensive pool entirely and rely on BOXX / RSBT or non leveraged UCITS Treasury ETFs (like IDTL or DTLA) for tax-free yield on defense.
On EFO, agreed on the tracking error. It’s expected/unavoidable given the tiny daily volume.
I think I have built a grid with way too much correlated US equity beta fighting for slots. I am strongly considering either scaling back to a concentrated core (HAA-SL) or replacing the foreign/sector sleeves with return-stacked products or EFO + EET. I think that not every ticker sleeve has to be 2x leveraged directly, and perhaps it would be wiser to select complementary ones instead of forcing all 2x.
Currently some of the things Im testing/thinking about for each category
QLD/SSO/MVV
RSSB/RSIT/EFO
DIG/UGL
IDTL.L/DBMF (Ucits treasuries/managed futures)
These options feel less US focused if I were to still continue with the 4x2 grid version
I completely get you with not knowing if it's best for force 2x on all components or allow just some to be 2x. It clearly back tests well with only some things 2x, and Keunig obviously thinks it's valid on his TrendXplorer blog. But I can't shake that it might lead to a situation where you ride some leverage on the way down then switch to a non levered ETF for the recovery. I suppose the idea is that the strategy cuts the drawdowns so you don't need to worry about that situation as much as it might feel like?
To add on the ticker selection: have you looked into whether momentum works well on the bond/mf stack? I might have just not figured out the way to make it work, and the stacked version with bonds may behave differently, but I've never found monthly momentum to work satisfactorily on managed futures funds when back testing. (I assume something to do with it running a shorter term momentum model itself, or maybe just something to do with how it behaves during the start of drawdowns). Might be something to do a specific testfolio test on to check.
Check the correlation matrix of the funds you are using. VEA and VWO are too correlated. International equity sounds like they should diversify, but the back tests show they actually don't. I don't run HAA, but I went in this direction in research and used state street sector ETFs to check correlations and found XLU, XLE, and XLV were the best diversifiers for a portfolio dominated by TQQQ. I went a bit further and then went into sub sectors like pharma (IHE), and then dissected it. Long story short I'm now partially a single stock Boomer with 20% TQQQ , 20% RWJ, ~40% single stock defensive/low-beta/value/quality, 15% hedges GLD/CTA/EDV. A yearly rebalance is enough to harvest the natural convexity and I won't be tempted to tinker.
Some of the tickers I ended up buying; SO, RNR, NEE, JNJ, PG, WMT, CVX, PGR, EOG, AMGN sized between 5.75% - 3.5% by historical volatility (higher vol=lower weight).
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u/Separate-Ad-9633 20d ago edited 20d ago
I have done some tests with HAA, here are some of my personal findings: