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.