Month: February 2015

Everyone seems focused on the Greek situation but I don’t think any near term news will be a large market moving event. Obviously if contagion goes above and beyond expectations or if it leads to other PIGGS wanting to exit then yah, of course, but I refer to the immediate upcoming news. Everyone knows about it, everyone expects it and recent headlines aren’t really moving the markets. In 2008, most people didn’t know what (CDS and MBS) stood for and surely had no idea the risk it could pose to the financial system. That’s more of a blindside that causes down moves. With the grexit you have everyone and their mothers uncle talking about it in coffee shops. It’s priced in. Any banks with exposure to Greece have long ago hedged their risks. So we have the market at all time highs again leading into the weekend (a long weekend at that) where Greece news is expected. It looks like No one seems to care about the risks Greece poses. At least not yet.

I am surprised by TLT, it continues down (as rates increase on the long term treasuries) despite continuing downward and, for the most, part negative rates in EU. That should help keep a base in TLT and set it up for a bullish move up.  I’d like to see it find some support around 127.5/128 range. Else, it’ll continue to put pressure on our overall portfolio.

We did great yesterday. Our momentum portion (happens to be Treasuries, bonds and REITs) held its own while the market roared which allowed us to gain some significant ground. Today we are seeing a bit of downside in the momentum portion and even more gains in the equities.

The alpha portion is doing well. The pair trade is still suffering but time could heal that.

I wanted to post a review of our portfolios

Protector (Alpha + Standard):  This is the all-weather portfolio. It’s a completely hedged equity portfolio. We purchase year-out ATM spy puts in the amount to 100% insure the equity and then we purchase about 30-40% in additional puts of which we sell against on a short term basis with enough extrinsic value to pay off the hedge over the course of 1 year. In essence, we purchase 140% 1-year out ATM puts, sell 40% short term puts with enough extrinsic value on a weekly basis (approx 65c) to cover the entire cost of the 140% long puts. It’s been backtested to death and works well with a very very low max draw down. A great strategy that can take on a little leverage. In essence, our portfolio is completely protected and performs in any bear markets though does slightly under perform in a prolonged bull market. Essentially, It performs in all market types but does have challenges in an on-going whip saw environment. The way I sell the puts is quite complicated and combats the whip saw weakness. This method took a few years to fine tune. All the complication is in how the weekly puts are sold. The secret sauce.

Further ,We do a split where we have the regular old market via RSP and another half of alpha generating equities that do have correlation to the regular market so as to be protected in any bear market. The alpha generation is based on a variety of quantitative analysis strategies. In general the alpha comes from some momentum analyis, quantitative analysis (mechanical trading) and even some 13F cloning.

Momentum: This component rotates through 15 ETFs (bonds, equities, treasuries, some commodities and REITs) by selecting the top 3 of the lot based on some relative strength analysis amongst other things and further the three must be above the 200 DMA and rotating on a monthly basis. It has a max draw down of 10-15% and expected to return 15-18% a year. It naturally avoids bear markets by selecting non-equity ETFs like TLT and VNQ during those environments. We’re currently in TLT, VNQ, LQD.  Those three have provided a 8+% return in January alone but are down 6-7% in February.

SPY/TLT pair trade: This is an option based strategy where we do a pair trade of credit spreads of SPY and TLT which are negatively correlated.  We did well in January and are still in the February trade. This is the highest variance portion of the portfolio and does have a smaller allocation.

Earnings Volatility trades:  We’ve done a few earnings volatility trades this year (GOOG, TSLA, SCTY, NFLX, FB, MSFT, BABA).  These are volatility based trades and are completely unrelated to any of the above.

Yesterday was a pretty good day for our portfolio despite the fact that TLT just fell another big chunk to 129 ish. It seems to have found some support with interest rates on the 10 year being around 2%. Obviously our momentum portion is down about 6%-6.5% for the month. That’s about 25% of our portfolio.  However,  Our alpha portion is having a great month and is kind of making up for some of that loss. We’re down on the month but we’re inching closer and closer to break even. We had a good Jan so if we can eek out a small gain in Feb with all of this crazy volatility, I’d be v. pleased. I mean, the S&P is up 5%, down 4%, up 5% down 5%. The TLT is up 10% then down 6.5%. It’s not easy an easy environment especially with our pair trades of which haven’t been all that negatively correlated lately. Both SPY and TLT were moving down in sync. That causes pain in a pair trade. However, we are still doing well and we’re positive so I am happy about that.  With a little bounce in TLT/REITs we’ll be very profitable over all.

I read a relevant article today. it starts off with “I got crushed last week. The accounts that I manage (for the most part) suffered losses and were down for the week. “.

Rough Week For Bonds: Why I’m Staying The Course

That was us with our TLT/REIT portion. Luckily we have a well diversified set of strategies that work to offset each other in extreme times. The volatility this year is astounding and it’s a roller coaster ride watching our balance move.

 

 

I was jut reviewing yesterdays protector results.  The market closed down -.45% and our result across both alpha and standard was -0.12%.  Doesn’t say much but it does give some indications to how the protector portfolio behaves overall.

TLT crashed after hours going down from about 131 to about 130.16.  The high of the day was around 132.  I don’t love seeing that but it should find support around 129/130 area.

We just had a fantastic blow out jobs report that has contributed to the fall in TLT, VNQ and LQD.  The basic tenant is that good numbers will prompt the fed to increase rates earlier rather than later and this pressures REITs, Utilities and Treasuries. Unfortunately this is the bulk of our momentum portfolio! However, I mean, the global situation is deteriorating (bad Chinese data, Greece, Ukraine etc) so who knows where the month will end.  Despite the positive numbers, many experts don’t see a reason for the fed to increase rates this year.  Alas, the market reaction (OVER-reaction) was a sell-off in anything affected by higher interest rates. This affects our momentum portfolio.

Momentum Portfolio (February)

In the momentum portfolio we still hold TLT (+.06%), VNQ(-0.33%) and LQD(+0.06%).  The momentum portion of our portfolio is suffering this month. It’s not overly surprising as we did just have an epic month in this portion of the portfolio, I guess we’re just reverting to the mean.  I mean, we’re probably still up 4% overall on that part. So no complaints! Though I post these sorts of short term results, we shouldn’t really be taking them so seriously.  The momentum strategy will average 14-16% a year (if we leverage 1.6x it’ll be 22-25%) and we’ll have periodic draw downs of 10-12% ( 16-20% leveraged). That’s what it is. There’s no discretion, nothing we can do to beat it, we’ve trusted in the strategy and we are along for the ride. My hope is that these various strategies will work together to make this ride as stable as it can be.  My aim is to remove all discretion from trading and follow the systems set forth.  Every 1st day of the month we rebalance the portfolio and take the top 3 of 15 ETFs and hope for the best. No discretion.

Pair Trade (February)

The pair trade for March is suffering as the massive drop in TLT over the past few weeks (nearly 6%!) hasn’t been accompanied by a big rise in SPY overall.  So basically, they are both declining. Not ideal but over time it’ll work out. We can expect 15-20% declines at times with this trade. It’s high variance. It will happen.  You can’t get 10-15% months without that sort of volatility.  Right now, after a successful month of the pair trade, well we’re kind of experiencing the dreaded volatility. We’re down probably about 5% as of right now on this trade. We did about 10% the month before (I still need to calculate everything).

Protector Trade (February)

The protector is doing fine and as expected.  It’s down as of today because well, its the start of the year and we’re still paying for the hedge. Down movements will bring the trade into a negative situation temporarily. We have to let the year ride out. I believe we’re probably down a few % on this one.  As the year goes on and as the hedge gets paid for, it’ll start turning a profit.  This is a full year portfolio and we expect it to do 12-15% a year (14-18% leveraged at 1.6) and it’ll have very low drawdowns even in crashes.

The alpha portion seems to be doing good this month compared to last. OCN has rebounded a bit and QCOM as well. We’ve got some winners as well, despite the market being down.

 

 

Sorry for lack of responses. I was at a very busy conference that was chalked full of meetings upon meetings and some socializing. The conference went very well and was a great opportunity for internal team building and realignment of the company goals. Was happy to be there.

Volatile times. Since December, SPX has lost 5%, gained 6%, lost 5%, gained 4%, lost 4%, gained 4%, lost 4% and now gained nearly 5%. The whipsaw isn’t great for our protector portfolio but it’s not doing too bad despite.

TLT -5.44% on the week which really hurts our momentum and pair trades for February. Let’s see how it does next week. A strong January for the portfolio is leading to a weak February at least so far. That’s mainly due to a terrible day for VNQ and TLT which is 66% of our momentum portfolio. They were down 3% and 2% on the day. A bit of a rebound in Both would do fantastic for the portfolio.

I’ve decided to invest a small portion of capital into the covenant optimal fund. It’s a 5x version of their classical fund and operates on 80% volatility. It’s a managed futures fund and would complement my portfolio very nicely especially as crisis alpha. I’d highly suggest listening to some podcasts of Scot Billington the founder. The thing I like is the low tied up capital required to obtain high return (with high risk of course). Remember it’s a 5x version (5x leverage essentially). You’d use 50k to represent 250k of risk. Lower tied up equity etc

Results for 2014:
*note: this is a very volatile version of the classical fund which returns approximately 14-15%. This version is extremely high volatility but you assign an equally lower amount of equity.

Some pics of London Town