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Up 4% in 3 Days - Five Stocks/Wk, Zero Margin, Fully Hedged


Yes. Its a crazy drop. So I should let c2 correct it?


Yes it usually sorts itself out by mid weekend. I have prompted them again on this today.


thanks for the quick update.


ur welcome. PM me at any time…


In your description, you suggest that you’ll hedge by going long RWM. Instead, it looks like you’ve been going short IWM shares. Going short may be fractionally better performance-wise, but it does cause a problem for those of us with our trading money tied up in IRA accounts. Is there a reason you’ve made this change, and is going back to the original plan possible, thus making this a long-only strategy?


The strategy has been long RWM (instead of short IWM) for a number of weeks. It won’t show up in closed trades, as it is a permanent position, which hedged the entire portfolio. In any case, rest assured, the hedge is RWM. Subscribers will be able to see this (sims can only see closed trades, so RWM not present, as it is a [permanently] open long position).


Below are current open positions (notice RWM long as hedge)…


I have a question. When the markets start moving higher won’t the RWM be losing more value or do you always adjust the size of RWM depending on market conditions?


No. RWM is a near 1:1 hedge. So if I am long 5 stocks worth $50k, I am also long RWM of equal (or near enough) $50k. I have tested the strategy long term (since 2001) on capIQ data (reliable) and the method has proven itself consistently. In bull markets the stocks tend to significantly outperform RWM. In bear markets (eg., current) the RWM protects the downside, but tends to perform better than the stocks. No guarantees as time will tell if this continues into the future, but I will keep at it )


I think what @AlgoSystems means is that when you are 100% hedged initially and things move hard to one side, you will suddenly be net long or short a certain amount. For instance:
Long $100 (5 stocks at $20 each)
Short $100 Index.

Stocks +10% (+10%)
Index +8% (-8%)

Now you are short $92 of the index and Long $110 of stocks. So in essence you are net long by a bit.

However I would say since you rebalance every week this should not be a real issue.


I understand. The most practical way to deal with this in my exp is the Monday rebalances - usually calc total long position in the 5 stocks, then buy/sell a small quantity of RWM to mirror. Intra-week, the balance can get away from me, but I tend not to disrupt the positions too much if at all.


Msg to @e-stat

Ref: Results of test using UWM (2x leveraged Russell 2000) as 50% hedge, vs IWM (1x leveraged Russell2000) as 100% hedge…

UWM (50%):

IWM (100%):


Not sure how a long fund is a hedge but this is quite interesting. Can you show the same charts for RWM and TWM please?



I have run sims this morning for both RWM, and TWM. With RWM you would buy 100% equal dollar value RWM as the value of long stock portfolio. With TWM you would only need to buy 50% of the portfolio value, as the ETF is a 2x leveraged inverse to Russell2000.

Below are the results of both sims…

(1) RWM Hedge…

(2) TWM Hedge…


Thank you for doing that! What do you make of it, that the long funds appear to be better hedges? Is it just an artifact of this long running bull market we have had? I wonder what would show if you took the charts back farther to include the Tech Wreck bear market.


@fiveHedged You state that one of your primary selection criteria is a FCF screen. FCF would be reported in quarterly financial statements during earnings season, So, this data input to your model only gets updated 4 times a year, which would make one think that the fiveHedged strategy should have a lot of turnover in Jan, Apr, Jul and Oct, and then be quiet for the rest of the year.

Instead, we’ve seen pretty regular turnover in fiveHedged almost every week since it started on C2.

Can you please explain?


Um… I’m going to go out on a limb here and guess it’s because prices change during the quarter. If when quarterly financials come out a company looks fairly valued from a P/FCF perspective, maybe it doesn’t pass the screen. If December 2018 happens and a company is down 20-30-40%, suddenly it looks cheap from a P/FCF basis, or at least cheaper than others, and makes the screen.

Fundamental analysis. Pretty much why stocks trade in non-earnings season. Some one drives it down for one reason and another manager picks it up for another reason.

Then again, probably all algos anyway. :smile:


@DogZebra_Investing is quite close to how we calculate value - as price is dynamic throughout the year, a stock can become cheaper (potential value) in purely P/FCF terms. In actual terms, we use Enterprise-Value instead of Market-Cap (Price), ie., EV/FCF, as well as EV/Capital, and relate this to ‘historical’ EV/FCF and EV/Capital ratio’s, to garner better value measurements. But FCF is not the sole criteria - we are also looking at short/medium term TA trends, revenue sustainability, gross margin growth (and sustainability), operating-income growth relative to industry-peers, etc. Factor-Investing takes a multitude of these type of criteria, before ranking (eg., top 20) based on a weighted-formula which puts individual rules into a whole/score (which allows the rankings and ultimately the top 5).


OK, I guess that fulfills my dumb question quota for the day.

Somehow I had the idea of FCF in absolute terms in my mind, without normalizing it for anything.

Must be mental fog from all the food and booze over Christmas.

That being said, from week to week he’s rotating into the best-value stocks from his pool of high FCF performance stocks, and the composition of the pool itself can change once a quarter when earnings come out. I know there’s a more detail to it, but I think this is the 2 sentence summary. It seems like a reasonable strategy thesis. The long-stock portion of this strategy is a combination of fundamental value investing, stock rotation, and pullback trading, tweaked to look at cash flow rather than earnings.

@fiveHedged Thanks for the detailed explanation. It gives a potential subscriber more confidence when the trade leader discusses the logic and mechanics of the strategy. It gives insight into what’s actually going on inside the box.


@fiveHedged, how about my questions about your charts that show long funds to be better hedges than short funds?

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