My "Core Plus" Strategy - Feedback on the "Plus" part?

[youbet]

Originally Posted by brewer12345

before the cycle turns downward.

Since you mentioned it......... when is the cycle turning downward. I could really, really use this information and can't find it anywhere!

[brewer12345]

Originally Posted by youbet

Since you mentioned it......... when is the cycle turning downward. I could really, really use this information and can't find it anywhere!

Different for the specific industries that these two are in. I think that the dry bulk shipping market is in a multi-year bonanza. If DRYS spikes, I will happily let my shares go because I have other, less risky positions in the industry. But i think the next 3 to 5 years will be embarassingly profitable ones.

For AHL, I suspect that the 2007 renewal season will be quite profitable, with property cat rates continuing to rise slightly. 2008 is probably the year that the build in capital and new entrants finally offsets all the stuff pushing demand way above supply in the industry. So I expect to liquidate in late 2007 or early 2008. But if I hear good things about renewals, I could stick around until 2009.

[eridanus]

Originally Posted by milmoose

The options point is a good one, but transaction costs tend to be a bit higher than with futures. I know the risk of the futures and would be limiting myself to 2.0X leverage, so I'm not too worried about margin calls (unless the index drops > 50%).

You'd have to roll your futures, which would increase transaction costs (including slippage). The farthest out Russell 2000 contract is Sep07.

Do I understand 2x leverage to mean you'd hold 2 contracts and keep one full contract amount as the performance bond? I.e., you'd hold 2 ER mini-contracts and keep ~$77000 in the futures account?

With $77000, you could hold 100 Jan09 strangles for the QQQQ at 10% OTM. That gives you 2 years for a >10% movement. The transaction costs would be $200 total, depending on the broker, and it would be 100% long-term capital gains, as well. That alone could save you $200.

[milmoose]

Fire'd@51,

I was thinking about this over the weekend:

even in theory, holding a portfolio with a beta of 2 does not mean you will get twice the market return. It means you will get an excess return (return minus the risk-free rate) that is twice the market's excess return.

That's true for an pure futures position, but the Rydex and Proshares funds own Treasuries as a backstop (similar to the PIMCO Real Return funds) so the "Beta 2" portfolio with futures can achieve double the market return (with double the risk).

[FIRE'd@51]

Originally Posted by milmoose

Fire'd@51,

I was thinking about this over the weekend:

even in theory, holding a portfolio with a beta of 2 does not mean you will get twice the market return. It means you will get an excess return (return minus the risk-free rate) that is twice the market's excess return.

That's true for an pure futures position, but the Rydex and Proshares funds own Treasuries as a backstop (similar to the PIMCO Real Return funds) so the "Beta 2" portfolio with futures can achieve double the market return (with double the risk).

The futures price contains a "borrowing cost" embedded in it. To have a beta of 2, you would only backstop half the futures with Treasuries, so you would still be borrowing the other half. So you will not get twice the market's return, even in theory, unless the borrowing cost were zero.