Beta Slippage

Beta slippage is a multi-day tracking inefficiency found in leveraged funds.  Leveraged funds must rebalance over a predetermined time frame.  For example a daily leveraged fund rebalances at the market close each day.  This means the price movements are calculated on a percentage basis for that day and that day only.  Due to rebalancing, the daily leveraged fund does not track true to its underlying index over a multi-day period.  This structural tracking inefficiency caused by the leveraged funds need to rebalance is defined as beta slippage.

The following is a multi-day example of how beta slippage could affect a 3x daily leveraged or inverse leveraged fund.

Day one: The tracked index & 3x daily leveraged funds’ price all start at $100.

Day two: The index moves +10% and the 3x leveraged funds move +/-30%

Day three: The index moves -9% which returns it to the original value of $100.  The 3x leveraged funds move +/- 27% and you would expect them to return to their original value of $100, but that is not the case!  The 3x leveraged fund goes down to $95 and the inverse up to $89 for a multi-day loss of $5 and $11 respectively.

These losses are an example of beta slippage.  HIT Capital has discovered how to beta slippage into gains through its proprietary trading strategy.

Volatility Drag Example Graph