Why I Believe Leveraged ETFs Like 7709 Are Essentially a Naturally Negative EV Product

It is essentially a long-term strategy that mechanically chases gains and cuts losses, continuously bearing the cost of volatility while also having to pay financing and derivative costs.

Written by: Big Orange

Many people understand 7709 as:

If SK Hynix rises by 1%, 7709 rises by 2%.

It sounds very simple.

Many even feel that it is safer than perpetual contracts because there is no clear liquidation line, and it won't suddenly "liquidate" like a contract account.

However, after truly understanding its daily rebalancing mechanism, you will find:

7709 is not simply "twice the Hynix."

It is essentially a long-term strategy that mechanically chases gains and cuts losses, continuously bearing the cost of volatility while also having to pay financing and derivative costs.

It bears the negative path effects similar to short gamma options sellers but does not receive the IV and Theta compensation that option sellers deserve.

This is the core reason why I believe it is inherently negative EV.

1. Why Must 7709 Constantly Rebalance?

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Assuming the fund's net value is 100 and the target leverage is 2 times, it needs to maintain a 200 exposure to SK Hynix.

If Hynix rises by 10%, the fund earns about 20, and the net value becomes 120.

The original 200 position rises, and the market value becomes 220.

At this point, the actual leverage becomes:

220 ÷ 120 = 1.83 times.

To restore it back to 2 times, the fund's target exposure should be:

120 × 2 = 240.

So it must increase the position by 20 after Hynix has already risen.

Conversely, if Hynix falls, the fund's net value will decrease faster than the market value of the position, causing the actual leverage to exceed 2 times.

To bring the leverage back down to 2 times, it must sell part of the position after Hynix has already fallen.

Therefore, the rebalancing direction of such leveraged ETFs is always:

Increase position after rising;

Reduce position after falling.

This is the standard:

Chasing gains and cutting losses.

2. Why Do I Say Every Rebalancing Results in Losses?

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The "losses" referred to here do not mean that an order is executed and immediately shows a loss on the books.

Rather, it means:

Every rebalancing is a delayed reaction to an already occurred market movement.

Hynix has already risen from 100 to 110, and the fund only realizes its leverage is insufficient, then adds to the position around 110.

But the time when it should have increased exposure is before the rise occurred, or at least during the rising process.

Now that the price has already risen, the buying price will inevitably be higher.

Similarly, Hynix has already fallen from 100 to 90, and the fund only realizes its leverage is too high, then reduces the position around 90.

The time when it should have lowered the position is before the fall occurred, or at least during the falling process.

Now that the price has already fallen, the selling price will inevitably be lower.

Therefore, from the perspective of "continuously maintaining two times leverage," there is a definite fact with every rebalancing:

It is always a step behind.

When the market rises, it earns less than it could have if it had increased exposure earlier;

When the market falls, it suffers more losses than it could have avoided by reducing exposure earlier.

This is the loss caused by delayed rebalancing.

Of course, some may argue:

If it increases the position after rising, and if it continues to rise afterward, won't the new position still make money?

Of course, it can.

But that is the profit generated by the next market movement.

After the next market movement occurs, the fund will again adjust the position based on the new rises and falls.

You cannot use the potential continued rise of the next market movement to deny the opportunity losses that have already occurred in the previous market movement due to not maintaining two times exposure in time.

More accurately:

The past market movement determines why to rebalance and how much to adjust;

The current rebalancing resets future risk exposure;

The future market movement determines the actual profit and loss after the new position is added.

However, compared to an ideal strategy that can maintain two times leverage in real-time, the losses from delayed rebalancing have already occurred.

3. Even in a Unidirectional Rise, Daily Rebalancing Also Has "Delayed Returns"

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This point is particularly important.

Some may feel that as long as Hynix continues to rise, 7709 can keep increasing its position after rising to achieve good compound returns, so rebalancing is not a problem.

But in reality, in a unidirectional rising market:

The higher the rebalancing frequency, the higher the returns.

Because profits can be reinvested earlier.

Let’s take the simplest example.

Assuming Hynix rises 5% in two stages in one day.

The total rise for Hynix throughout the day is:

1.05 × 1.05 - 1 = 10.25%.

Assuming 7709 starts the morning with a net value of 100 and an initial exposure of 200, if it does not adjust all day and only restores two times leverage near the close, the daily return would be approximately:

10.25% × 2 = 20.5%.

The net value changes from 100 to 120.5.

However, if after the first stage rises by 5%, it immediately restores the leverage back to 2 times and participates in the second stage rise, the result would be:

In the first stage, Hynix rises by 5%, and the two times product rises by 10%:

100 becomes 110.

The fund immediately restores the exposure back to 2 times.

In the second stage, Hynix rises again by 5%, and the two times product rises again by 10%:

110 becomes 121.

The final return is 21%.

In the same unidirectional rising market:

If it only adjusts once a day, the return is 20.5%;

If it adjusts once in the middle, the return is 21%.

If it changes to adjusting once every half hour, the profits can be reinvested even earlier, and the final return will further approach the theoretical result of continuously maintaining two times leverage.

This indicates:

In a unidirectional rising market, adjusting only once a day still has delayed returns.

The fund did not fail to earn two times returns; rather, it reinvested profits too late, thus not earning a more complete two times compound return.

The same applies to unidirectional declines.

The more timely the rebalancing, the earlier the fund can reduce its position, thereby minimizing subsequent losses.

Adjusting only near the close each day essentially has a double delay:

During the rising process, profits are not reinvested in time, so less is earned;

During the falling process, high leverage is not reduced in time, so more is lost.

Therefore, if the rebalancing frequency is changed from once a day to once every half hour, the results in a unidirectional market would be better.

If continuous adjustments can be made, it would be closest to truly maintaining constant two times leverage.

4. But the Higher the Rebalancing Frequency, the More Severe the Loss in Volatile Markets

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The problem is that higher frequency rebalancing is not free.

Assuming Hynix first rises from 100 to 110 during the day, then falls back to 100.

Ultimately, Hynix does not rise or fall.

If 7709 does not rebalance all day and only calculates at the close, theoretically, the net value change is close to zero.

However, if it restores two times leverage at the 110 position, and then Hynix falls back from 110 to 100, it will take a larger position to absorb the subsequent decline.

In the first stage, it rises by 10%, and the net value changes from 100 to 120.

After restoring two times leverage near 110, in the second stage, it falls back from 110 to 100, with a decline of about 9.09%.

The net value of the two times product will become:

120 × (1 - 18.18%) ≈ 98.18.

Hynix ultimately returns to the starting point, but the product loses about 1.82%.

This indicates that leveraged ETFs have an irreconcilable contradiction:

Low rebalancing frequency leads to more serious profit delays and stop-loss delays in unidirectional markets;

High rebalancing frequency leads to more frequent chasing gains and cutting losses in volatile markets, resulting in more severe volatility losses, price differences, slippage, and trading costs.

Thus, adjusting only once a day does not eliminate this structural problem.

It merely makes a choice between:

Delayed losses in trending markets

and

Frequent rebalancing losses in volatile markets.

5. Why It Functions Like Dynamic Hedging for Option Sellers?

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Those who have dealt with options can easily understand this logic.

Assuming a trader sells a large number of Calls and Puts, then continuously delta hedges.

Because option sellers are usually short gamma:

When the underlying rises, the portfolio delta increases, and the trader needs to buy the underlying;

When the underlying falls, the portfolio delta decreases, and the trader needs to sell the underlying.

Thus, the delta hedging of option sellers is also:

Buy after rising;

Sell after falling.

It is also chasing gains and cutting losses.

When the market constantly oscillates up and down, selling traders will continuously buy high and sell low, and the greater the volatility, the greater the gamma losses generated by dynamic hedging.

However, why can option sellers still make money?

【Summary (plain text, may be empty)】：

Because he received the option premium right from the start.

The premium includes:

IV, which is implied volatility;

Theta, which is time value.

As long as the final:

received IV and Theta

is greater than

actual volatility losses, jump losses, and transaction costs,

the seller's strategy can make a profit.

In other words, the option seller bears Short Gamma, not without compensation.

The market pays him a volatility risk premium as compensation.

The Biggest Problem with 7709: Bearing Similar Short Gamma Losses Without Receiving Theta

7709 will also:

increase positions after rising;

reduce positions after falling;

chase gains and cut losses repeatedly in fluctuations;

the higher the realized volatility, the more severe the path loss.

Therefore, from the perspective of trading flow and path dependence, it exhibits characteristics similar to negative Gamma and negative realized variance.

However, investors in 7709 did not receive the option premium.

No one pays you in advance for bearing this path risk of chasing gains and cutting losses with a certain amount of IV.

It also does not have a clear expiration date, and there is no Theta gradually becoming yours as time passes.

It is a mechanical rebalancing strategy that operates almost perpetually.

Moreover, it not only does not receive volatility premiums but also needs to continuously pay:

• Swap financing costs;
• Option costs;
• Management fees;
• Bid-ask spreads;
• Slippage during rebalancing;
• Market impact;
• Currency exchange and other product fees;
• Risks of secondary market discount and premium return.

So its real structure is closer to:

Twice directional returns

minus

realized variance drag

minus

financing costs

minus

derivative costs

minus

management fees

minus

transaction costs.

This is why I believe it is inherently negative EV.

What Does "Negative EV" Mean Here?

I am not saying:

Regardless of how much Hynix rises, 7709 will definitely lose money.

If Hynix experiences a very strong, sustained, and smooth unilateral rise, the directional returns may indeed cover all losses, and 7709 may also make significant profits.

But this does not mean that the product structure itself is positive EV.

Games in casinos can also allow some people to make money, but it does not affect the long-term disadvantage of the game rules for players.

What I mean by negative EV is:

In obtaining the same directional exposure, 7709 has an additional layer of certain negative carry, path loss, and product costs compared to the ideal twice strategy, low-cost perpetual, or investor-managed leverage.

Investors must not only correctly judge that Hynix will rise, but the rise must be large enough, the trend must be sustained enough, and the price path must be smooth enough to cover the continuously deducted costs within the product.

In other words:

Investors must not only look at the right direction but also the right path.

Just looking at the final price is not enough.

For example, if Hynix ultimately rises by 30%, it does not mean that 7709 will definitely achieve a 60% return.

If it experiences multiple:

• Large rises;
• Large falls;
• Rebounds;
• Further declines;

Even if Hynix ultimately returns to a higher position, 7709 may significantly underperform a simple twice cumulative return due to daily leverage resets and volatility losses.

Why Are High Volatility and Frequent Reversals Most Fatal to It?

Assuming Hynix:

Rises by 10% on the first day;

Falls by 9.09% on the second day.

Ultimately, Hynix returns to the starting point.

But a twice daily leveraged product:

Rises by 20% on the first day, net value changes from 100 to 120;

Falls by about 18.18% on the second day, net value changes from 120 to about 98.18.

Hynix ultimately does not lose money, but the leveraged ETF loses about 1.82%.

If this kind of fluctuation continues, the net value will be continuously eroded.

Every time the market reverses, it punishes the last rebalancing.

So these types of products are truly afraid not just of unilateral declines but of:

• High volatility;
• Severe fluctuations;
• Frequent reversals;
• Mean reversion.

And SK Hynix itself is a single stock with high volatility.

Putting the daily leverage reset mechanism on such an underlying asset usually results in much more severe long-term path losses than low-volatility index leveraged ETFs.

"Will Not Liquidate" Is Just a Layer of Packaging, It Does Not Mean Net Value Will Not Approach Zero

Many investors like leveraged ETFs because they seem less likely to trigger a sudden liquidation at a certain price like perpetual contracts.

But this merely transforms explicit liquidation into implicit net value decay.

During continuous declines, the fund will continuously reduce positions:

The lower the net value, the smaller the position;

The smaller the position, the less absolute loss next time.

So in many continuous decline paths, it will not end suddenly at a strong liquidation line like a personal contract account.

However, its net value can continuously approach zero.

From 100 to 20, it has already lost 80%.

At this point, it is not enough to rise by 80% to break even; it must rise by 400%.

So the so-called "will not liquidate" often just means:

There is no clear strong liquidation moment;

But the principal can still approach zero through continuous chasing gains and cutting losses, volatility losses, and cost erosion.

It turns liquidation into a slow process.

Why Changing Fixed 2x to "Up to 2x" May Not Benefit Old Investors?

These products later adjusted the fixed two times to a flexible leverage structure of "not exceeding two times."

From a risk management perspective, this can reduce:

• Daily rebalancing scale;
• Swap capacity requirements;
• Market impact;

The speed of net value collapse in extreme market conditions.

When leverage drops from 2x to 1.2x or 1.1x, the necessary chasing gains and cutting losses transactions will be significantly reduced.

However, for old investors who are already deeply trapped, it may create a very awkward structure:

During the decline phase, bear losses with leverage close to 2x;

After severe market fluctuations, the product reduces leverage to 1.1x or 1.2x to control risk;

Then even if Hynix rebounds, investors can only participate in the recovery with lower leverage.

That is:

High leverage bears declines;

Low leverage bears rebounds.

This does not mean that the manager necessarily has malicious intent.

Reducing leverage can indeed reduce the risk of further declines in the future.

But from the product structure perspective, it will also reduce the ability of already trapped investors to quickly break even.

And the fund can still continuously collect management fees, while derivative trading counterparts can still continuously earn financing, Swap, or option-related income.

Why Perpetual Contracts May Be More Efficient Than 7709?

Assuming there exists a:

• Sufficiently liquid;
• Reasonable funding;
• Reliable oracle;
• No serious discount or premium;

Risk management transparent Hynix perpetual contract.

Professional investors can at least decide for themselves:

• Whether to maintain a fixed position;
• Whether to restore twice leverage daily;
• Whether to adjust every half hour;
• Whether to increase rebalancing frequency when the trend is clear;
• Whether to reduce leverage in a fluctuating environment;
• Whether to stop loss in advance;
• Whether to supplement margin;
• Whether to hedge with other assets.

In contrast, 7709 writes all these decisions into the product rules.

Investors can only passively accept:

• When to rebalance;
• How much to adjust;
• What the actual target leverage is;
• How much Swap to use;
• How many options to use;
• How much derivative cost to bear;
• When to reduce leverage.

Of course, perpetual contracts also have:

• Funding;
• Liquidation;
• Exchange credit;
• Oracle;
• Liquidity;
• ADL and other risks.

So perpetual contracts are not a free lunch.

But for those who truly understand how to manage margin and positions, they can at least control:

• Rebalancing frequency;
• Leverage level;
• Stop-loss rules;
• Financing costs;
• Holding period.

Rather than handing over all decisions to a set of mechanized product rules.

Final Summary

7709 is not simply "twice Hynix."

It is more like:

Twice long Beta

plus

mechanical rebalancing similar to Short Gamma

minus

realized variance

Subtracting

Financing costs

Subtracting

Derivative costs

Subtracting

Management fees

Subtracting

Transaction costs.

Each rebalancing is a delayed reaction to the market movements that have already occurred:

Increasing positions only after prices rise;

Decreasing positions only after prices fall.

In a trending market, if it rebalances every half hour, it will reinvest profits earlier and reduce downside exposure sooner than if it only rebalances once a day, resulting in better performance.

However, in a volatile market, more frequent rebalancing leads to more instances of buying high and selling low.

Thus, it faces an inescapable structural dilemma:

Rebalancing slowly incurs delayed losses;

Rebalancing quickly incurs volatility losses.

More importantly, it bears the burden of dynamic hedging similar to that of option sellers, chasing trends without receiving the implied volatility (IV) and theta compensation that option sellers typically enjoy.

The only compensation it can rely on is a sufficiently strong, sustained, and smooth upward trend in the future.

Therefore, it is not a product that will "lose money any day."

However, it is a product that inherently carries negative carry, negative variance, delayed rebalancing, and high holding costs, making it a negative expected value (EV) product.

Investors not only need to judge the direction but must also assess:

• Trend sustainability;
• Volatility;
• Price paths;
• Rebalancing frequency;
• Financing costs;
• Swap and option costs;
• Secondary market premiums and discounts.

For ordinary investors, even determining the direction correctly over the long term is challenging, let alone judging so many variables simultaneously.

The notion of "not being liquidated" merely hides the risk of forced liquidation within a process of continuously diminishing net value.

Just because it appears safer does not mean the structure is more advantageous.

Being correct in direction does not imply that one should choose the tool with the highest costs, worst paths, and least control.

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