Hedging

Investing Strategies Abandoned Arctic Outpost #13
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Champ:

Just wanted to get some feedback on hedging a “Saul Portfolio”. First, I wanted to estimate how much Saul’s portfolio has drawdown since the Fall. I started with his Portfolio on October 29, 2021 being up 82.8%. Then, I took his year ending portfolio on December 31, 2001 where he was up 39.6% for the year or a drawdown of 43.20% from Oct. 29, 2021 to Dec. 31, 2021. Then, I subtracted another 26.6% based on his February 26, 2022 portfolio results. I wanted to determine what his drawdown would be from November 19, 2021 to March 11, 2022. I used the NDX index as a proxy for Saul’s portfolio to extrapolate his portfolio from this November 19, 2021 date. Based on this extrapolation, I estimate that Saul’s portfolio suffered approximately a 72% drawdown.

So why am I interested in November 19, 2021? On the Mechanical Investing Board, they track three primary, “Bear Catchers”. The one that I am interested in is derived by using the $NAHL on stockcharts. This is the Nasdaq New Highs minus New Lows. Two different people applied two different moving averages so as to reduce whipsaws. One is a 9 day EMA (Exponential Moving Average) and the other is a 13 day EMA. Not too much difference. The 9 day EMA went bearish on Nov. 18. 2021 and the 13 day EMA went bearish on Nov. 19, 2021. They both remain bearish till today. Here is the chart from stockcharts:

https://schrts.co/gjajXViX (let me know if there is a problem with the link)

So how would you hedge?

Assume you had a Saul portfolio with a value of $100,000 on Nov. 19, 2021. Then, at the end of the trading day on Nov. 19, 2021(this is the date that the 13 day EMA goes bearish), you short one future’s contract on the e mini Nasdaq 100 index (/NQ on the TD Ameritrade Platform). Futures trade approximately 23 hours a day so it is easy to short a futures contract either after market close or before market open. So if you did this, your Saul portfolio would have lost approx. $72,000 (October 29, 2021 to March 11, 2022 and your short futures position would have profited approx. $65,000 from Nov 19, 2021 to March 11, 2022. Currently, the margin requirement on one e mini Nasdaq 100 is approx. $22,000. It would have been a little different on Nov. 19, 2021, but not that much.

I appreciate any feedback.

Sandywater

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Hi Sandywater:

To be fair - that sounds like a whole lot of work to me and rather than going through all those machinations to come up with Saul’s status - that perhaps just post on Saul’s and ask him directly about his port’s status. Not sure if he would tell you or not but anything else is just a shot in the dark. As for the hedging thing - you are going to have to find much smarter folks than me for help with that.

A couple of the subscription services that I monitor do some hedging. In particular, the I/O fund pops up with it now and again - but I just don’t even think about it. Much too complicated for my many muddled mind - such that it is. So I just sit here hedgeless with earnest intent to just weather the storm.

But - if you happen to come up with something to perhaps save the day - please let me know as a matter of pure objective curiosity.

All the Best,

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Hi Sandywater -

I’m with Champ that this is a complicated ask. However, it worth pointing out your percentage math appears to be significantly off.

I started with his Portfolio on October 29, 2021 being up 82.8%. Then, I took his year ending portfolio on December 31, 2001 where he was up 39.6% for the year or a drawdown of 43.20% from Oct. 29, 2021 to Dec. 31, 2021. Then, I subtracted another 26.6% based on his February 26, 2022 portfolio results.

That’s not the way percentage math works. A portfolio worth $182.80 on 10/19 and $139.60 on 12/31 is a drawdown if 23.6% and not 43.2%. Indeed:

$182.80 - (.23632)$182.80 = $139.60

Since that number is so different, I’ll leave it to you to recalculate the current YTD based on your statement you simply subtracted another 26.6% off what looks like an incorrect number to start. While I can appreciate formulaic or mechanical approaches for evaluating companies (and I use some myself), they are only as good as the assumptions or inputs being used in the formula. It’s the same problem we are seeing recently with all the “modeling” attempts at Saul’s. Incorrect inputs lead to incorrect conclusions.

This is obviously a different board, but the same basic concept applies. Pretty much everyone is having a rough go as far as returns in 2022, but if you’re going to backtest anything you need to make sure the baselines are correct. Otherwise, everything falls off from there. I’d be curious to see if you come up with anything worthwhile if you attempt to take this on.

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Thanks stocknovice for the feedback. However, the point I was trying to make was to follow the chart and to hedge when the EMA moves below the zero line. I did not have the guts to fully hedge but rather did some smaller hedges more recently. I just was interested in getting some feedback if anyone thought that this may be a good idea. I knew that this kind of post would not be allowed on Saul’s board, so I thought that I would post it here. Thank you again for responding.

Sandywater

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Hi,

You can get a bit of an idea about hedging by following Puru Saxena on Twitter. He’ll usually say when he’s hedged and how much. Most of my investment dollars are in my IRA so futures and shorting are out but I’ve used SQQQ, which is the triple inverse QQQ. If QQQ goes down 1 point, this is supposed to go up 3%. My mistake was that I sold the SQQQ during a brief rally and never got back in.

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Since Saul’s portfolio is mainly cloud based SaaS stocks and if you wanted to hedge those, one way might be to buy puts on the IGV or CLOU ETFs.
But of course it might be too late (I hope).