Hedged Convexity Capture

Leveraged funds and inverse funds inherently suffer from degradation, especially over a longer time-period. This happens because they're rebalanced daily, so although a leveraged 3x ETF might meet its goal of performing at 300% of its benchmark on each individual day, over time the fund's performance in relation to the benchmark or index will likely be significantly different due to the effects of compounding, and won't be able to maintain its 3:1 performance. This degradation is referred to as "negative convexity".

Here's a strategy that takes advantage of this inherent degradation of the assets. I don't in any way advocate it as a safe investment. It involves short-selling leveraged inverse ETP's (exchange traded products), and carries additional risks, such as the broker closing the position early and theoretically unlimited risk. Since the ETP's are young, this strategy also hasn't been tested during a true down-market, such as 2008. However, the backtested returns are pretty amazing (CAGR: +53.5%, Max DD: -22.40%) and I like the idea of the strategy attempting to gain on the "crappiness" of inherently "crappy" products.

I've personally been using this strategy for a few months with a small allocation, and so far it has been very successful. An additional cost for this strategy is the interest rate that the broker charges for borrowing the assets; at Interactive Brokers it's currently 3%-3.5% per year.

1. Short TZA (Direxion Daily Small Cap Bear 3x ETF), 50% allocation
2. Short TMV (Direction Daily 20+ Year Treasury Bear 3x ETF), 50% allocation
3. Rebalance weekly to maintain the 50%/50% dollar value weighting between the two instruments

To help with the weekly rebalancing, I've attached a Rebalancing Tool that will automatically calculate how much to buy or sell, using the "Rebalance by Desired Target Percentage" section.
Enter the current values in their respective columns and the "Reallocation Target %" to 50% and 50%. You'll get values under the "Funds to transfer" column and whether to buy or sell under the Direction column. You can also use this tool to help with rebalancing your portfolio in general.

QH Rebalancing Tool (Excel)

To read more about this strategy, please see:
http://seekingalpha.com/article/2110753-part-v-hedged-convexity-capture-continues-to-be-the-worlds-best-performing-etf-strategy