{"title":"Levered and Inverse Exchange-Traded Products: Evidence from Simulations","authors":"D. Chambers, Stephen M. Horan","doi":"10.3905/jai.2022.1.179","DOIUrl":null,"url":null,"abstract":"Levered exchange-traded products have been criticized as offering inferior long-term returns for two reasons: their higher volatility and, apparently, the belief that volatility diminishes long-term expected returns. Following the approach of Pessina and Whaley (2021) we analyze simulated returns of levered and inverse exchange traded funds (ETFs) and conclude that their expected long-run values are not diminished by volatility. We identity natural counterparties to the rebalancing trades of levered exchange traded funds (LETFs) and analyze the impact of autocorrelation on daily-rebalanced LETF returns, theoretically and empirically, for both LETFs and their counterparties. The results indicate that negative (positive) autocorrelation in daily returns will cause LETFs to perform relatively poorly (well) and their counterparties to perform relatively well (poorly). Accordingly, the extent to which levered and inverse ETFs have legitimate hedging applications and reasonable risk-adjusted returns (setting aside trading costs and fund expenses) depends on the extent to which the underlying returns are consistent with weak-form market efficiency.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.4000,"publicationDate":"2022-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Alternative Investments","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.3905/jai.2022.1.179","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
Levered exchange-traded products have been criticized as offering inferior long-term returns for two reasons: their higher volatility and, apparently, the belief that volatility diminishes long-term expected returns. Following the approach of Pessina and Whaley (2021) we analyze simulated returns of levered and inverse exchange traded funds (ETFs) and conclude that their expected long-run values are not diminished by volatility. We identity natural counterparties to the rebalancing trades of levered exchange traded funds (LETFs) and analyze the impact of autocorrelation on daily-rebalanced LETF returns, theoretically and empirically, for both LETFs and their counterparties. The results indicate that negative (positive) autocorrelation in daily returns will cause LETFs to perform relatively poorly (well) and their counterparties to perform relatively well (poorly). Accordingly, the extent to which levered and inverse ETFs have legitimate hedging applications and reasonable risk-adjusted returns (setting aside trading costs and fund expenses) depends on the extent to which the underlying returns are consistent with weak-form market efficiency.
期刊介绍:
The Journal of Alternative Investments (JAI) provides you with cutting-edge research and expert analysis on managing investments in hedge funds, private equity, distressed debt, commodities and futures, energy, funds of funds, and other nontraditional assets. JAI is the official publication of the Chartered Alternative Investment Analyst Association (CAIA®). JAI provides you with challenging ideas and practical tools to: •Profit from the growth of hedge funds and alternatives •Determine the optimal mix of traditional and alternative investments •Measure and track portfolio performance •Manage your alternative investment portfolio with proven risk management practices