>The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade.

And from 2000 to 2010, it was down 23%.

>there’s no reason why with $10B trading all asset classes one can’t return 70% YoY

There are plenty of reasons. First, if you have a small amount of money, it remains liquid. This is why HFT firms can have Sharpes around 8 - they can move the money fast because they are smaller firms.

If you have 10B USD you cannot respond to the market. You have to trade slowly and choose your positions to last a while. This leaves you with a Sharpe of around 1 if you're optimistic. Otherwise in your fantasy, you could turn 10B into 1T in 8 years.

Another reason is that as your portfolio scales, it becomes harder and harder to find uncorrelated returns.

If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?

You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too.

If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008.

Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.

Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise.

Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.

RenTec does use a lot of leverage, but they only can do it because there Sharpe ratio ((return-riskfree)/volatility) is over 7x. This means that if there fund had a unlevered return of 3.5% then their vol would be 0.5%. Let’s say their risk limit is to cap vol at 10%, this means that their theoretical return would be 70%. It doesn’t exactly work like this because of volatility drag. If you’re interested check out my blog post on the topic: https://smabie.github.io/posts/2019/10/04/vol.html

3x levered nasdaq 100 would give you an annual volatility of at least 30-50%, occasionally much much higher. The crazy thing is that medallion presumably achieved this with a very small volatility and no significant drawdowns. Nasdaq 100 was down -42% in 2008, so levered 3x you would be out of business.

3x leverage ETFs rebalance daily, so you would still have some money since the biggest single day loss of Nasdaq is ~10%.

Incidentally this also means that if you buy the etf on day 1 and the underlying is at 100, on day 2 the underlying falls to 99 then on day 3 goes back to 100 then you would be left with less than 100% of what you started with (assuming perfect tracking and no fees).

Volatility drag. Not trying to be a shill but I wrote a blog post about the mathematics of volatility drag if anyone is interested:

https://smabie.github.io/posts/2019/10/04/vol.html

It involves deriving “perfect” leverage ratios and talks about some other interesting (imho!) stuff.

Yes, this is called "decay", and it's why you don't want to hold a leveraged fund over any long period.

According to my models there are very few market environments in which you would make less money with a leverage ratio of 2.5x. In order maximize return your leverage should be:

Expected Return/Expected Variance

For example even if the expected return is 1% and the vol 5%, the ideal leverage ratio for maximizing return is 4x!

In short, a 2-3x leveraged ETF is an excellent investment and should outperform the index in almost all market conditions. It’s when your leverage ratio goes over 5x that you start to have major problems a lot of the time.

I can appreciate this, but the fund decay actually has nothing to do with leverage.

All "leveraged" ETFs (to the best of my knowledge) are synthetic - they achieve their "leverage" using derivatives, not by borrowing. These derivatives are not free, and like an option, can expire worthless. That's how the value in these ETFs evaporates over time, regardless of how the market performs.

Of course not “regardless” of how the market performs, take a look at UPRO over the last 2/3 yrs. But those are in theory reasonable concerns, however empirically most leveraged funds have performed as promised relative to their benchmarks (with a couple notable exceptions I admit). The entire point of derivatives (as suggested in the name) is that they inherantly bear an underlying relationship to their underlying security.

If you look at UPRO, its daily returns almost exactly track 3x of SPY. There’s no long-term “decay”, unless you are referring to volatility drag. VIX etfs are the notable exception, in that they do suffer from persistant negative carry.

Of course. It’s not an apple to Apple comparison, it’s just to point out those returns are possible. Also, would you rather have invested your salary from 2003 to 2020 not leveraged or always leveraged x3, bust in 2008, and then cash out today? Probably the latter. And that’s pretty consistent. After a recession, you usually have a decade of growth. So not exactly hard to do either.

sure, if I get to assume I'll have a steady salary indefinitely, I would prefer the 3x leverage. in reality, the stability of your job is correlated with the market. if I chose the leverage scenario, my portfolio would be valueless at the exact moment that I was most likely to lose my cashflow. without leverage, I would have taken a big hit, but still have had some money to draw on.