Agreed. I’m truly blown away by the supposed alpha if your beta is effectively neutral. This will be an interesting one.
Having tested the hedge using various instruments (IWM, RWM, SH, SPY, E-Mini Russell Futures, and E-Mini S&P Futures), the best instrument, in terms of ETF’s, is the ‘SPY’. Below are the results, from 2007-2018 (inclusive), for the fully-hedged portfolio…
I have applied a separate test for hedging with ‘futures’, and the results are superior. However, for purposes of capital-requirements for entry (eg., to trade one contract S&P mini future short, would equal $136,000 (this is not margin requirment, but total value), so the long stocks would need to equal the same (ie., 5 x $27200 = $136k), which for some is out of reach…
Hence, I have decided to stick with the SPY hedge, as this is more manageable, and easily rebalanced weekly to equal the long positions.
Note: If it is not possible for investors to short, it is perfectly feasible to trade the inverse ETF’s (RWM, SH, etc), as a hedge. The object is to protect against market risk at low cost (hence short SPY, or long SH, or emini futures are good instruments).
I totally agree about backtests. I have done hundreds, possibly thousands over many years (permanent subscriber to S&P/CapitalIQ data)…
For me, backtests have their place, in seeing which particular ‘fundamentals’ work and which don’t. For instance I have always (consistently) found free-cash-flow measurements a far superior indicator versus EBITDA or EPS based metrics…
These kinds of ‘testable’ methods through a long historical period (ideally 2000 onwards, right through 2008 and to the present day) do provide some value. One has to be very careful not to force-fit (also called curve-fitting) metrics, which is especially rampant amongst ‘technical’ analysts, which I make a double-effort to steer clear from (I am well aware of such delusions built by ‘optimization’ and ‘look-ahead’ bias). Backtesting has it’s place when used objectively, and it is a good ‘starting point’ from which to go forward.
For interested parties, I checked the results for varying the hedge-%-weightings. For example, if the portfolio was to be hedged only 20%, or 40%, etc., instead of the full 100%. Below are the results, for dates: Dec 25th 2006 to Nov 4th 2018.
Note: The last column shows a 0% weighting, hence the portfolio is unhedged (100% long, open to higher macro/market risks). It is up to individuals to decide how much they would want to hedge the five-stock long portfolio. For me personally, the 100% hedge, while resulting in a slightly lesser annual average return, provides better peace of mind…
The hedge is based on taking a short position in SPY (see earlier comments above), for x% of the long five-stock portfolio, from 100% (full hedged) to 0% (no hedge).
I’ve seen other C2 systems which run weekend scans/screens enter their orders to open and close trades as market orders for Monday mornings.
On your strategy page, for the trades shown thus far, it appears trade entry and exit days and times can vary but your final selection screening is run on the weekend. Do this mean your resulting trade prospects are entered as limit orders to buy or sell and can be executed whenever prices hit their targets?
Herein lies the problem. Slippage on low vol small caps. I assume you are entering the market via limit orders since your entries have various timestamps. Stocks with only 50 k in avg daily volume will experience dollars of slippage with any meaningful subsriber count. As much as i want your strategy to inject some much needed quality into the C2 blender , i fear lack of liquidity issues will be a large problem.
Well, October was interesting enough… S&P 500 lost about 7%.
How was the performance last month on your own live account?
October was not a great month…
Total Return (4 weeks) in October (hedged) was -3.40% (net after commissions).
@fivehedged I´m sorry but that seems like total BS to me. You´re telling us that you trade liquid stocks without leverage for 100% return per year? So in this 9 year bullmarket you should have made 512x your money whereas the 3x leveraged, daily compounding ETF SPXL could only do 33.5x with perfect timing during the best bull market ever?
You can do a backtest so I believe you are smart enough to not fool yourself. Which makes the conclusion even worse…
There is nothing to complain about high risk / high reward systems if the dev is upfront about it. But you basically say it´s a safe 80% p.a. because you´re fully hedged…
Guys, am I the only one who finds that completely hilarious?
Yes we all find it hard to believe, but let the man play it out on C2 at least before you mock him.
He has answered our questions and states he has only been running it for 4 months. He has stated it’s fully hedged, which mean from market beta (I’m sure not completely but mostly). Not from draw downs in general.
Interesting idea. Fun to watch. He has set the bar very high, so lets just get our ready.
I don’t know about hilarious but I am scratching my head over this one…
I tend to agree with you. Hedge funds play around with such things all the time but have a hard time making money consistently.
I really hope that fiveHedged is correct and wish him the best, but as always I will just observe before I put any money down. It definitely looks too good to be true. When I first came to Collective2 I too thought I had this perfect strategy to get rich quick and have had to come to terms with reality since.
Something about the numbers just seems off too. This sniff check is very rough and ignores the effects of rebalancing etc., but if it is you can get an annualized return of 99.42% with no hedge and still get 85.44% with a full hedge and only 1/2 the capital to the 5 stocks then I think a very rough estimate of the return of the short strategy alone would be about 71.46% annualized (the average of 99.42 and 71.46 is 85.44).
I find it even harder to find a good short strategy on SPY than a long strategy which makes me think that if a long strategy producing 99.42% annually isn’t unbelievable surely a short SPY strategy earning 71.46% annually is.
That being said who knows, maybe it is as good as he says. fiveHedged, I hope you are right and would be very interested to hear any rational about how you are able to reduce the the amount of capital allocated to your five stocks by about 1/2 and have the return only get dropped by less than 1/6. @fiveHedged, if you don’t mind answering. How profitable is the hedge if you were to do the hedge strategy with 100% of strategy capital and none of the 5 stocks you mention?
@CharlesTines, I wonder about the profitability of the hedge as well since it is adjusted each time a position in one of the five stocks is opened or closed.
You are not alone.
Hard to believe in 80-90% annual return with 10-15% dd.
Only time will tell if this strategy is profitable or not…I will reserve my comments until afterwards.
It is a refreshening to see a new style of strategy rather than the typical trade until the account is blown up approach that most strategies in C2 seem to be.
Doesn’t pass the smell test here either. Small caps having a lousy year - wonder what the YTD perf is for the system.
Yes, I 100% agree. If he sticks to his system the risk I see is not performing as well as planned or not as well as the market. Because of the low leverage etc., an account blow up seems to only be a risk if he doesn’t stick to his stated plan.
I´m sorry but that seems like total BS to me. You´re telling us that you trade liquid stocks without leverage for 100% return per year?
Stocks with 50 k dailly average volume are not liquid. Slipppage will eat this system alive. Not hating just being real. Just wait till orders from subscribers total anywhere near the avg daily volume of any of these lower vol stock selections and you will witness huge slip.
@Fivehedged please feel free to correct me here if you feel i have misspoken.
I fully understand some users’ comments, but really feel it is counter-productive to talk about this endlessly on this forum, or convince anyone.
I will focus on the trades each Monday. Time will tell if this strategy is profitable (or not).
My commitment will be:-
(1) I will never use leverage on the long-side, all five-stocks will be bought with the capital I have, and not more (eg., $50k capital divided into 5 stocks).
(2) The permanent hedge will always be applied 100% to the 5-stock long position. So continuing with the example, I would short SPY, or IWM for the 100% long-value ($50k), and this will always remain in place, adjusted to the full long dollar value.