Other Ideas for Hedging?

[Mark Faust]

Good Morning,

I decided to use QT Lite to see how each of the strategies/sub strategies have fared so far this month. (I was trying to get a glimpse into the robustness of the strategies since I believe we will see more month like February going forward for a little bit.)

While I know that Gold has always been a decent hedge against inflation, I would have expected it to do a little better during this month.  It just seems that the negative correlation is not there. (the current 30day correlation between SPY and GLD was +.17 as of yesterday…..It maxed out at +.39 on 2/2

It looks like the US Sectors Short Inverse ETF’s sub strategy is the only “hedge” that has a positive return so far this month.

Are there any more ideas for hedging??  Commodities maybe??  A sub strategy of Inverse sectors?

thanks
Mark

[Frank Grossmann]

I will publish a strategy update later today which will add the possibility to go short a US industry sector to our Hedge sub-strategy. Together with Treasuries and Gold there should always be something which works more or less.
Gold did not work so well as a hedge during the last correction, but this is quite normal in the first moment of a correction because there have been many leveraged investors in urgent need of liquidity. In such a moment they normally sell whatever they can to increase their margins and this includes also Gold and Treasuries.

[Invest]

I thought about the same, there are many possibilities to consider there are also some very interesting new products for Hedge purposes like the Cambria Tail Risk ETF.
The strategy update sounds interesting let`s see!

[reuptake]

I’m surprised and bit disappointed by the change to hedge strategy (“Strategy update: Our updated hedge now allocates to Treasuries, Gold or to a short US sector position. The hedge does not use currency ETFs anymore, which were conflicting with common 401k / IRA guidelines.”).

I was wondering why one of better performing ETF recently is not included. Of course I could do my homework and check the Hegde strategy setup in QT, but still I think there should be announcement prior to changes.

I don’t know if the “new” Hedge is better or worse than “previous” one. It has significantly worse Sharpe ratio… so it’s quite possible that for someone who don’t even know exactly what 401k is it would be beneficial to use “previous” hedge.

[reuptake]

Now I see the announcement when I opened previous version of QT… Probably QT11 was already using new hedge so the annoucement wasn’t displayed.

I believe the new hedge would be as efficient as the previous one, although I feel less comfortable using just one big allocation in one ETF as a hedge (previous strategy was more diversified). Eg. now my set of strategies is more than 50% in TLT…

[reuptake]

Interesting:

http://www.capitalspectator.com/profiling-correlations-for-the-major-asset-classes/

[Mark Faust]

So…I have been keenly watching the latest “Hedge” strategy…..
It has been bouncing back and forth between GLD and TLT and since it is a “Top 1 ETF” it is bouncing at back and forth at 100%.
While I can see that the optimization favors the single ETF theory, I wonder if it would not be better to diversify the hedge fund a bit and take the top 2 ETF’s??? This lowers the CAGR/Sharpe but also lowers the volatility and the DD…

thx
Mark

[reuptake]

[quote quote=51644]So…I have been keenly watching the latest “Hedge” strategy…..
It has been bouncing back and forth between GLD and TLT and since it is a “Top 1 ETF” it is bouncing at back and forth at 100%.
While I can see that the optimization favors the single ETF theory, I wonder if it would not be better to diversify the hedge fund a bit and take the top 2 ETF’s??? This lowers the CAGR/Sharpe but also lowers the volatility and the DD…

[/quote]

I was testing this and Top1 is performing bit better. But then again I’ve tested UIS and WTOP4 strategy using GLDUSD strategy as a hedge. And the performance is pretty decent. So my plan is when Hedge is 100% TLT use GLDUSD version of one of those strategies, to diversify a bit.

[Mark Faust]

Thanks Reuptake…..
Is it me or does nothing seem to be holding a negative correlation in the hedges……..
It seems the market goes up and TMF/TLT goes down… (expected)
Then the market goes down and GLD/TMF/TLT goes down….

With the high concentration in TLT/TMF hedges, we lose money/barely break even when the market jumps up…
Then when it drops, the hedges either drop or dont kick in enough and you lose money again….

I know I am just complaining….but losing money sucks…..I guess I need to find the right combination….
Even SoS is sitting at 5.01%…..Maybe I should just go that route and leave the creative combinations to the professionals…

off the soapbox now….
Mark

[quote quote=51650]

Mark Faust wrote:

So…I have been keenly watching the latest “Hedge” strategy…..
It has been bouncing back and forth between GLD and TLT and since it is a “Top 1 ETF” it is bouncing at back and forth at 100%.
While I can see that the optimization favors the single ETF theory, I wonder if it would not be better to diversify the hedge fund a bit and take the top 2 ETF’s??? This lowers the CAGR/Sharpe but also lowers the volatility and the DD…

I was testing this and Top1 is performing bit better. But then again I’ve tested UIS and WTOP4 strategy using GLDUSD strategy as a hedge. And the performance is pretty decent. So my plan is when Hedge is 100% TLT use GLDUSD version of one of those strategies, to diversify a bit.

[/quote]

[reuptake]

Well… I understand your pain, but effective hedges are difficult to find nowadays. Keep in mind, that there’s third hedge (short strategy from USSector metastrategy), last time I’ve checked it it was -11% MTD… I don’t know what I’d do if Hedge will switch to it.

The thing is we’re now in very defensive mode, Hedge is large part of our portfolio. Maybe when we switch to more balanced setup, Hedge won’t have such a big impact on performance.

[Author]

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