A few weeks ago I had mused that holding a double short pair of leveraged ETFs might be a great negative correlating investment to hold in tandem with a regular long position on a plain vanilla ETF. The double short pair would be expected to have a positive rate of return if the volatility of the underlying index was high enough, and a hypothetical backtest had shown that it could smooth overall portfolio volatility.
I still want to re-iterate that you shouldn’t be playing around with this stuff unless you understand it.
Having said that, I set up a live mock portfolio on June 3rd with $100,000. The strategy has added about roughly 3% of net alpha for the period to date (June 3rd to June 23rd). Simply holding XIU and you would be down 5.84%. By holding 50% XIU and 50% in the paired short, you were only down 2.84% (and that includes subtracting the interest you would pay on the short based on prime + 1.5%).
Unfortunately I can’t plot the path of the portfolio as Google Docs doesn’t support macros (so I can’t pluck daily values out), but just from eyeballing it, the return is higher and the overall volatility has indeed been lower as expected. Below are the live results (updates every few minutes during trading hours) – I don’t know if this will show up in emails, so click on the title of this post to see the results on the website.