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Pastimes : The Justa and Lars Honors Bob Brinker Investment Club Thread -- Ignore unavailable to you. Want to Upgrade?

To: Dave Shares who wrote (96)	7/7/2000 10:24:18 PM
From: Gary D	Read Replies (1) \| Respond to of 10065

Dave, re: "The deficiency in USPIX tracking 2x QQQ is basically mathematical. I trade USPIX at short term peaks, and USPIX almost always tracks 2x QQQ on a DAILY basis. But for a longer term hold, USPIX , because it is a 2x fund, can provide lousier returns, because of the volatility. Because QQQ peaked after 2/4, thereby diminishing the size of one's portfolio, before declining, the return did not match up. It is the same as what will happen if you lose 50% of your investment, you need to make 100% back just to break even. Because the QQQ peaked first between 2/4 and 3/27, one's investment in USPIX went down by 36%. One needs at that point to make 56% on remaining capital just to break even. USPIX from 3/27 to 5/22 did go up 68%, but since it was on a reduced investment base (64% of original capital), the overall return was lousy compared to what would have happened if one had just shorted QQQ. By the way, the RYDEX Arktos Fund (1.0 beta I believe) also underperformed QQQ during that period, but again, this is because of the trade going bad at first." Thanks for your thought-provoking post. This seems to explain the performance. Looking at the arithmetic, I believe it can be concluded that for such a leveraged fund there is not a unique one-to-one relationship between the fund value, and the value of the index on which it's based. The relationship depends on the 'path' taken by the index. For example if the trade 'goes bad' at first, then, when the index returns to its initial value (its value at the time of the fund purchase) the fund value is likely to be LESS than at the time of purchase. With one of these funds the consequences of missing the market direction can be more severe than simply shorting; however the rewards are potentially much greater. Example: for a 2x short fund like USPIX, if the Nasdaq 100 drops by 50% in a straight line, then USPIX should go up by about 290%. (Assumption: 69 consecutive 1% drops in the index, and 69 consecutive 2% increases in USPIX). If anyone sees an error please correct me. (As far as I know, Justa hasn't banned the use of this thread as a scratch pad <g>).