The recent post noting that 90% of equity mutual fund managers under-perform the S&P reminded me of this question I had a while back. I have no hands on experience with the futures mkt, so please don’t laugh too hard. Say you want large cap equity exposure and you have $1M. You put $900k in a one-year T-Strip (936k face) and then open a long $1M notional position of a S&P 500 future using the remaining cash to fund any margin / mark to mkt requirements. Doesn’t this strategy result in 100% of the S&P 500 return + 0.9 RFR - trans costs? If the requirements of marking to market exceed 100k (the S&P declines by 10%) you need to generate more cash. So sell strips. Or maybe you start off with 850k in the strips and buy some index puts? I guess what I am asking is: by using a leveraged futures position, can’t you generate a return in excess of a benchmark by some fraction of the RFR?
Nah, the price of the futures contract will have the cost of carry built in.
very good intuition but no, b/c the futures price that you are locking in already includes this RFR (and expected dividends)… suppose that S&P currently trades at 1500 then S&P in one year would be 1575 @ assuming 5% RFR - Dividend Yield rate. So if you long the S&P future you would be forced to buy at 1575. Otherwise there would be arbitrage in the markets…
But - 1) Who says you need to put it in Treasuries? If you’re willing to take equity risk, why should you not be willing to take some other kind of risk in the cash portion? 2) The taxation is very different. If you do this for one day and make 3%, in the futures markets 60% of that gain is taxed at long-term capital gains rates but if you did it using SPDRS on margin it would all be short-term capital gains.
Ahhh, that makes sense. No free lunch. JD 1.) I guess my attempt initially was to participate 100% in the return of a benchmark (the S&P 500 in this example) and use leverage just to boost the return enough to ensure that I beat the benchmark. (90% of mf’s fall short and why index if you can beat the index with a treas. position and a little leverage?) As you suggest, with $1M you could put $800k in the SPDR, enter into a long S&P futures contract notional $1M and the result would be 180% of the S&P. I imagine you might want to package that with some puts. Do they have an ETF for that yet? 2.) taxes stink.
DFA uses this strategy for their enhanced index funds. They attempt to beat the S&P 500 by using short term bonds (using a variable maturity strategy) for the cash portion.
Or if the margin requirement is 10% with your million dollars, you could get as many as 10 S&P futures contracts and then get 1000% S&P return. Good luck with that! “Sir, yes this is John down at Calyon with a margin call. Could you please wire us $1.2 M by 3:00 PM today?”
slouiscar Wrote: ------------------------------------------------------- > Ahhh, that makes sense. No free lunch. > > JD > > 1.) I guess my attempt initially was to > participate 100% in the return of a benchmark (the > S&P 500 in this example) and use leverage just to > boost the return enough to ensure that I beat the > benchmark. (90% of mf’s fall short and why index > if you can beat the index with a treas. position > and a little leverage?) > > As you suggest, with $1M you could put $800k in > the SPDR, enter into a long S&P futures contract > notional $1M and the result would be 180% of the > S&P. I imagine you might want to package that > with some puts. > > Do they have an ETF for that yet? > > 2.) taxes stink. ProShares has a 2x levered S+P fund. Also a 2x levered short S+P fund.
HoldSideAnalyst Wrote: > ProShares has a 2x levered S+P fund. Also a 2x > levered short S+P fund. I knew they had shorts but I did not know that they had leveraged long. Thx. Wow, I would love to be head cheese in the meeting when someone suggests we call our leveraged long ETF product “Ultra ProShares”. I think I would slip up and say something like: “Sweet, but maybe we should throw in a jumbo or a mega… YES, thats it, Ultra Mega ProShares. Wait, no no you’re right we should go modest and just stay with Ultra Pro.”