tag:blogger.com,1999:blog-7905515.post8344113885467196602..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Levered ETFs Highlights Volatility DemandEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7905515.post-78224165666942883222012-06-14T10:34:57.620-05:002012-06-14T10:34:57.620-05:00Lasse,
Interesting, thanks for the link, I haven&...Lasse,<br /><br />Interesting, thanks for the link, I haven't read that. <br /><br /><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1393995" rel="nofollow">Cheng and Madhavan (2009)</a> basically find that the leverage effect is really a correlation, and the main driver of leveraged underperformance are 'transaction costs' from these leveraged funds. At least, that's my inference of their work. <br /><br />EricEric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-21562334199809998642012-06-14T09:20:24.193-05:002012-06-14T09:20:24.193-05:00This is Lasse Pedersen at AQR, NYU, and CBS. This ...This is Lasse Pedersen at AQR, NYU, and CBS. This post makes an interesting observation. The existence (and fees!) of leveraged ETFs provide an insight into the drivers of the beta effect: Namely, some investors are averse to using outright leverage and hence demand securities with “Embedded Leverage”. This is indeed the title of a recent paper that I wrote with one of my colleagues at AQR Capital Management, Andrea Frazzini. We show how leveraged ETFs and options are designed to embed leverage and that embedded leverage lowers returns, very much in the spirit of your discussion. The underlying theory of leverage constraints can both explain leveraged ETFs as well as many of the other empirical findings related to the beta effect (as discussed in our companion papers), though other things may contribute as well, of course. <br /><br />Check it out: <br /><br />http://pages.stern.nyu.edu/~lpederse/papers/EmbeddedLeverage.pdfAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-12922767132527898652012-06-14T08:06:07.505-05:002012-06-14T08:06:07.505-05:00We advise institutional investors and I think abou...We advise institutional investors and I think about this a lot. A lot of interesting ideas become less interesting if the expected return is far enough below your nominal return targets. In reality it's likely not just pension funds that have nominal return targets. People probably set these subconciously, almost surely in suboptimal ways (i.e. via behavioral biases). <br /><br />Leverage aversion is a real phenomenon. Investors that are happy to pay exorbitant fees to hedge funds for levered beta, are often unwilling to consider futures based leverage at the portfolio level.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-14119030378390656522012-06-13T10:28:51.992-05:002012-06-13T10:28:51.992-05:00From my experience there is a large (larger than y...From my experience there is a large (larger than you'd think) sub-set of scalpers that love these products because they present a more robust P&L opportunity intra-day. They have no interest in trading something that has a 1% daily range but all the interest in trading something that has a 3% daily range even if it's just a levered version of the exact same thing. Those scalpers, by definition, are also the least sensitive to the leverage costs used to generate that larger range because their holding period is minutes or hours, not days or weeks. They also account for a disproportionate amount of volume given that same turn-over issue.<br /><br />If your model is to purely trade technicals on an intra-day basis, these levered products are actually fundamentally better securities to trade.BRMhttps://www.blogger.com/profile/17864068100462781592noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-37179418144203032632012-06-13T09:45:34.248-05:002012-06-13T09:45:34.248-05:00Short both.Short both.Mercurynoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-48791077666589029392012-06-13T05:16:57.395-05:002012-06-13T05:16:57.395-05:00I think the threshold effect in potential returns ...I think the threshold effect in potential returns you propose may have potential. With the thousands upon thousands of financial products investors need to sift through in order to build their portfolio, it makes sense that they would "filter" them based on something like that.<br /><br />On the other hand leveraged funds do provide a useful service: we don't live in an MM world (I can't borrow at the same rates they do), and my leverage is prohibited by regulations anyway. Leveraged funds are a good way around both issues.Anonymousnoreply@blogger.com