Alternatively, returning to the LTPZ ETF with its duration of 20 years, a 3 percentage point rise in rates would cause its value to fall by 60%. Using the 3x levered TTT with duration of 18 years, a 3 percentage point rise in rates would imply a mouth-watering cumulative return of 162%.
I am confused. This is not a lot of return at 10 year timelines, and calling it “mouth-watering” seems a bit excessive. A cumulative return of 162% over 10 years is equivalent to around 10% annually, which is around as good as putting a money into a normal ETF over the last 20 years (which averaged around 8-10% over the last 20 years), and this is not considering that since I am short the market, in any world where I am wrong, I will likely lose a lot of money. If I take the downside into account, I end up with an annualized return of around 5-6% on this portfolio, which really doesn’t seem great to me.
Taking the math here at face value, you are suggesting a trading strategy with a ~5-6% annualized return, which is maybe barely competetive with other investing strategies, and a lot less than the average return of most EA-adjacent investor who have been thinking about this stuff for the last few years. Like, yeah, maybe you can very slightly outperform the market, but this seems hardly like a strong correcting force, and this definitely doesn’t seem like a good pitch that I should move my investment away from just holding tech-concentrated ETFs with a bunch of Nvidia exposure.
I might just be misunderstanding the returns you are claiming here, and the exact financial trade. Am I missing anything? What trading strategy do you concretely recommend that will make me money if I believe that timelines are shorter than this that outperforms something simple like buying Nvidia stock (and ideally will make me money at least a year or two before I do expect the world to end, since I don’t think I really gain much by having more money just before AI kills everyone)?
(Edit: Adjusted calculations for 10 years instead of 18 years)
Sorry, I meant to say 18 years (now edited), which is the number of years from the quote (“with a duration of 18 years”), which is presumably the time for the treasuries to mature, though I guess if you expect the market to move earlier than that, you should also expect returns earlier than that.
Let’s plug in the 10 year number instead, which the OP argues is “decisively rejected” and then calculate the expected return of this instrument given expected growth.
In the last 10 years the TTT ETF had a return of approximately −85%. I sure feel really confused about whether it makes sense to forecast a negative return for an asset like this, and to expect this trend to continue, especially in a conditional case like this, but I sure feel quite confident taking a bet that in the business-as-usual case your triple-leveraged bet against treasuries will have a negative expected return somehow (since it’s primary purpose is usually hedging).
So, I don’t know, my guess is going short the market in the business-as-usual world is a pretty bad idea, and you will probably indeed lose 80% of your investment over the next 10 years, if AI doesn’t happen.
So, assuming that I am betting $10,000 on this, and I am 50% confident on 10 year timelines. Then in this world I will make ($10k∗2.62)−($10k∗0.8)=$18.2k, i.e. an 80% return over 10 years, which is around a 5% annual return, and so lower than historical performance of ETFs.
Duration doesn’t mean time to maturity. It’s a measure of bond sensitivity to interest rates. Higher duration = more sensitivity. It’s measured in years tho which is confusing. You can make your 162% in one year if the interest rates move as the authors say, which is pretty mouth-watering!
(edit: just to showcase the degree of difference, a bond with 40 years to maturity can have duration of just 10 years if the bond’s coupon value is 10% & market rates were also 10% at the time of isssuance. This means the value of the bond will change less with rising rates. A 40-year bond with a 1% coupon, issued when market rates were also 1% will have duration of around 33 years, which in plain English just means that if interest rates go up a lot you get “FTX-linked tokens in November” returns. Bonds are tricky things and their pricing is weird is especially in ZIRP environments)
Yep, makes sense. I adjusted my calculations to be about 10 years, to more directly reflect the post, which doesn’t seem to change much.
Agree that if all the other details checked out, and you had 1-2 year timelines, this might imply a higher expected return, but I don’t currently see why it would imply that the markets decisively reject 10 year timelines, even if you buy the rest of the model (which I also have a bunch of other critiques of).
I am confused. This is not a lot of return at 10 year timelines, and calling it “mouth-watering” seems a bit excessive. A cumulative return of 162% over 10 years is equivalent to around 10% annually, which is around as good as putting a money into a normal ETF over the last 20 years (which averaged around 8-10% over the last 20 years), and this is not considering that since I am short the market, in any world where I am wrong, I will likely lose a lot of money. If I take the downside into account, I end up with an annualized return of around 5-6% on this portfolio, which really doesn’t seem great to me.
Taking the math here at face value, you are suggesting a trading strategy with a ~5-6% annualized return, which is maybe barely competetive with other investing strategies, and a lot less than the average return of most EA-adjacent investor who have been thinking about this stuff for the last few years. Like, yeah, maybe you can very slightly outperform the market, but this seems hardly like a strong correcting force, and this definitely doesn’t seem like a good pitch that I should move my investment away from just holding tech-concentrated ETFs with a bunch of Nvidia exposure.
I might just be misunderstanding the returns you are claiming here, and the exact financial trade. Am I missing anything? What trading strategy do you concretely recommend that will make me money if I believe that timelines are shorter than this that outperforms something simple like buying Nvidia stock (and ideally will make me money at least a year or two before I do expect the world to end, since I don’t think I really gain much by having more money just before AI kills everyone)?
(Edit: Adjusted calculations for 10 years instead of 18 years)
Accounting for fees, it’s actually a lot worse than you wrote, see here: https://forum.effectivealtruism.org/posts/8c7LycgtkypkgYjZx/agi-and-the-emh-markets-are-not-expecting-aligned-or?commentId=LmJ6inhSESoJGyWjQ
where did the 16 years you mention come from? don’t a lot of people have AI timelines shorter than that?
Sorry, I meant to say 18 years (now edited), which is the number of years from the quote (“with a duration of 18 years”), which is presumably the time for the treasuries to mature, though I guess if you expect the market to move earlier than that, you should also expect returns earlier than that.
Let’s plug in the 10 year number instead, which the OP argues is “decisively rejected” and then calculate the expected return of this instrument given expected growth.
In the last 10 years the TTT ETF had a return of approximately −85%. I sure feel really confused about whether it makes sense to forecast a negative return for an asset like this, and to expect this trend to continue, especially in a conditional case like this, but I sure feel quite confident taking a bet that in the business-as-usual case your triple-leveraged bet against treasuries will have a negative expected return somehow (since it’s primary purpose is usually hedging).
So, I don’t know, my guess is going short the market in the business-as-usual world is a pretty bad idea, and you will probably indeed lose 80% of your investment over the next 10 years, if AI doesn’t happen.
So, assuming that I am betting $10,000 on this, and I am 50% confident on 10 year timelines. Then in this world I will make ($10k∗2.62)−($10k∗0.8)=$18.2k, i.e. an 80% return over 10 years, which is around a 5% annual return, and so lower than historical performance of ETFs.
Duration doesn’t mean time to maturity. It’s a measure of bond sensitivity to interest rates. Higher duration = more sensitivity. It’s measured in years tho which is confusing. You can make your 162% in one year if the interest rates move as the authors say, which is pretty mouth-watering!
(edit: just to showcase the degree of difference, a bond with 40 years to maturity can have duration of just 10 years if the bond’s coupon value is 10% & market rates were also 10% at the time of isssuance. This means the value of the bond will change less with rising rates. A 40-year bond with a 1% coupon, issued when market rates were also 1% will have duration of around 33 years, which in plain English just means that if interest rates go up a lot you get “FTX-linked tokens in November” returns. Bonds are tricky things and their pricing is weird is especially in ZIRP environments)
Yep, makes sense. I adjusted my calculations to be about 10 years, to more directly reflect the post, which doesn’t seem to change much.
Agree that if all the other details checked out, and you had 1-2 year timelines, this might imply a higher expected return, but I don’t currently see why it would imply that the markets decisively reject 10 year timelines, even if you buy the rest of the model (which I also have a bunch of other critiques of).