How about you try it? And let us all know how it works out for you!
Why are you only rebalancing after a RS? These funds move off %, so it doesn't matter if you rebalance the day before or the day after the RS, the % change of your holdings will be the same. Might as well just rebalance monthly! Look at this example:
You're assuming a 90% decay in 6 months - ridiculous - but let's go with it. That means the fund will lose 31.5% each month. If you don't believe me, here's the math:
Start with $100.
Month 1 lose 31.5% = $68.5
Month 2 = $46.92
Month 3 = $32.14
Month 4 = $22.02
Month 5 = $15.08
Month 6 = $10.33
$10.33/$100 = 10.33%, or roughly 90% lost in 6 months.
If you really expect that kind of hemorrhage, why don't you just rebalance every month?
Let's start with your 3x ETF Alpha shorting at $100/share. This gives you $100K credit and are short 1000 shares. At the end of month 1, you buy back the 1000 shares at $68.5 each, for a profit of $31,500. Now you turn around and short $131,500 worth of Alpha, trading at $68.5/share - 1919 shares. At the end of month 2 the fund is trading at $46.92, so you buy the shares back at that price. This gives you a new total of $172,912. Short 3685 shares in month 3, buy them back at the end of the month for $32.14, or a total of $118,435.90. Now you have $227,388.10. Start month 4 by shorting 7074 shares at $32.14 and at the end of the month buy them back for $22.02, giving you a new total of $299,006.72. Now in month 5 you can short 13578 shares, closing them out at the end of the month for $15.08 for the end of the month total of $393,257.20. Finally we get to month 6, where you short 26078 shares. Month 6 closes out at $10.33, which costs you $269,385.74 to close your position. This represents a profit of $123,871.46 in month 6 to bring your new account balance to $393,257.20.
Instead of rebalancing your holdings every 6 months, with your assumptions you could turn $100K into almost $400K in only 6 months by rebalancing monthly!!!! That's an annualized gain of over 1400%! You could turn $100K into $1.4 million in only a year!!!
Please put this into action and let us all know how it works out for you.
For those considering this however, I can tell you 2 things:
1) These assumptions are WAY too high. Even with a leveraged volatility fund in deep contango I wouldn't expect any higher than 15% monthly on a consistent basis.
2) Unless you practice capital management strategies you WILL get liquidated from a margin call.
And the above example doesn't include margin rates, HTB fees, etc. But by all means, give it a shot. After all, what do I know?
