Strategy: Holding a 3x Long ETF and its corresponding 3x Short ETF
Author: rmpwealth
Creation Date: 12/26/2012 1:07 PM
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I came across the following strategy from Seeking Alpha that sounds too good to be true. I would like to backtest to confirm, but need help setting it up if someone would be so kind.

Strategy Concept: Holding a 3x Long ETF and its corresponding 3x Short ETF would seem to hedge each other (i.e. -- the gains from one would be about the same as the losses from the other, and thus over time the pair would zero out); but according to the article's backtest they do not -- according to the article's backtest, the pairs lose significant money almost every time. Therefore, the strategy is to short the pairs. The purported result of the spcific below strategy for the past year is approximately a 60% gain with a MaxDD of only about 2%. Like I said, too good to be true?

The specific strategy is as follows: Deposit into a Portfolio $100,000 cash. Short the following 3 pairs of ETFs: RUSS (25%), RUSL (25%), GASL (15%), GASX (15%), NUGT (10%) and DUST (10%).

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Here's why I don't even need to backtest the idea to tell that this might be a fluke:

1. These ETFs exist since late 2010 at best.
2. They started gaining relative liquidity only a year ago, in late 2011. Ideally, here's where a good backtest should start.
3. Most of them (like RUSL and RUSS where 50% of the capital will be allocated) still have a very low turnover.
4. One trade (in each) does not have statistical significance.
5. To stay valid, a medium/long-term backtest (e.g. Daily/Weekly data) should comprise different market moods (rangebound, volatile, directional/trending, flat...). You decide if one year of testing is enough to satisfy this criteria.

So, consider today the end of the sample data period of the strategy; here's where its out-of-sample period starts. Let's revisit it in a few months or even a year and see how well did it fare.
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