Hedging using TMV

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Hedging using TMV2017-03-03T15:27:12+00:00
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  • Alexander Horn
    Keymaster
    Post count: 389

    Q: “In several of your blog posts, you advise shorting TMV as a hedge and leaving it in the account. This means we would never realize any gain from it, although we need to pay the cost of borrowing the money monthly. Do you ever sell any of the hedge if the price goes down, to cover the cost of borrowing, and then buy it again when it goes lower?”

    A: Contrary to a long position a short position will lose value over time. So, if you open a TMV short position of 10’000$ and Treasuries go up, then TMV will lose value. After some time your short position will for example only have a value of 9’000$. Now because you want to keep a 10’000$ hedge, you will have to sell more TMV for 1000$.
    In fact you are doing exactly the same as someone who has the +3x leveraged TMF to hedge. His TMF position would have gone up from 10’000$ to 11’000$. To keep it at 10’000$ also he would have to sell ETFs for 10’000$.
    So the effect of rebalancing is exactly the same for long and short ETFs.

  • Roger
    Participant
    Post count: 2

    I also question holding a short on TMV long term as a hedge. It needs to be closed and repurchased monthly to obtain optimum results.(this only happens in shorting stock)
    This has been thoroughly discussed and analyzed on Seeking Alpha under Cliff Smith’s Strategies. http://seekingalpha.com/article/2444425-benefits-of-short-selling-inverse-leveraged-etfs Then scroll down to Comments and in particular read:22 Aug, 03:28 PM about rebalancing and covering the short and selling short again each month in order to obtain the highest return.
    Thank you for looking into this.

  • Vangelis
    Moderator
    Post count: 157

    Roger,

    In my experience, having executed trades and done the math in Interactive Brokers accounts, existing positions do not have to be closed and reopened – that is what mark to market accounting and portfolio margin management does. However, to maintain a certain portfolio allocation level, as Alex explained above, one may have to add (or subtract) from an existing position, but never close and reopen just to “reset it”. I work with institutions managing billions in trading assets, and that is not how it is done, even if it is written by someone on Seeking Alpha.

    • Jeffrey Loesser
      Participant
      Post count: 1

      Scott–elsewhere on the site Frank recommends using TLT over EDV as a hedge. Here you and Alexander talk about a constant short TMV as a hedge and managing the position as needed. Somewhere else I recall one of you recommending selecting just one hedge (TLT?) if you are combining multiple strategies.
      I am combining multi strategies. If I short TMV as my “constant” hedge, how might I adjust that TMV short if the MYS calls for EDV hedge, UIS for TLT and BRS hedges with TLH for example?
      Thank you for your insights.

  • Frank Grossmann
    Moderator
    Post count: 167

    Let me respond for Scott. I just posted the new MYRS strategy email.
    I have now included a table showing all possible alternative allocations. This way you can easily choose the one which uses for example TLT as hedging Treasury for all your strategies.

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