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


Great find @FarhanSaadiq

My only concern now would the epic backtest that was shown before, followed by a system that went under.
Again, this is why I don’t put much faith in backtests posted on the forums.
I guess we’ll see. Still wish people would stop changing their user names and hiding their past…


Lol…a slip up from the trade leader…:roll_eyes:

I guess everyone is allowed to have bad strategies so lets hope this new strategy is better than the old one.

As long as the trade leader is sincere and not bragging about his strategy and wants to bring forth winning strategies there is no harm in discovering old scrapped strategies.

Its up to everyone in the forum to critic the strategy.


Respectfully, the original method did not ‘go under’. From time to time, I discover valid potential improvements based on fundamentals (cash-flow, profit/loss, balance sheets). For instance, fiveHedged is a strategy that additionally incorporates EV/BookValue for each company and compares the ratio to the industry/peer median, placing [more potentially undervalued] stocks nearer the top. This results in a superior method, with much lower drawdowns as the companies are already near the bottom in terms of EV/Sales valuations.

I also want to keep companies with higher-then-peer debt ratios out, at a time when interest rates are likely to rise, hence added a debt/capital ratio comparisons to the algo…

The results provide better ‘quality’ stocks in the top-five. It is this type of approach that has led to letting one [profitable] system drop, and replacing with the better more fundamentally-robust method (fiveHedged).

All of this is an effort to provide the best strategy that I can.

In future [as I have learnt] closing a strat down is not a good idea - it is better to keep fiveHedged up to date, with any valid (fundamentally based) tweaks/updates posted in the strat-description.


Nothing wrong with closing strats down. Trading is hard.

Just can’t stand the people that try to hide their old strategies by coming on here with a new username.


Fair point. Trust me there is nothing hidden or any negative motive in the namechange. I prefer the brand name fiveHedged (username) as it more accurately represents (in a word) the fact that my strat is hedged. I just prefer it. Anyway, hope to continue delivering results that count :slight_smile:


I see the benefit of being fully hedge as you described last month. But your backtest of being up 60%+ annually while fully hedge still yet to be seen. Every trader would love to be hedged at all times but at what cost ?


The strategy I use is primarily for finding the right stocks to trade - it is factor-based using multiple (actually 12) fundamental/technical mix rules. I personally prefer the full hedge despite the cost as it allows peace of mind. Not every trader would use a hedge, some partially hedge their positions and vary according to how overbought the market becomes (eg., x standard deviations away from the benchmark).

There is no getting away from the cost of hedging. I can - if you like - run a sim/backtest (for what it’s worth, but it’s a good place to start) comparing a non-hedged vs fully hedged strategy. The drawdowns will differ significantly, which is one key reason the hedge is absolutely necessary imo.


I think the strategy is good if we get a sustained move in 1 direction but with this up a few days then down a few days market its quite difficult to have above average gains.

Backtests of course never reveal what gains/losses we can get in the current year since we have just completed a 10 yr bull market and I think we will probably have a sideways year this year.

What kind of results do you think you would get with sideways movement per year?


I am confident we will beat the S&P as the strat [based on backtests] has always done so since 2000+ (caveat: clean/trustworthy data was available only from 2007 onwards, so I do not place as much reliability on pre-07 data). 2018 was tough but we were ahead the S&P significantly, so I am expecting this to continue.

I feel the markets itself will be negative through much of 2019, as it has to [almost by force] adjust to the quantitative-inflation, but value-companies can still be found and even more so. One interesting point I want to share is an indicator I devised which looks at the ratio of value-companies which qualify based on the 12-point algo I use, relative to historical averages. The equilibrium is around 8.2%. When the number of value-companies exceed this equilibrium, the S&P tends to reverse/rally into a bull market. I also add to this the coppock-curve as a long terms cyclical measure. Looking at these inputs right now, there is still some room left for the market to correct, before a stronger bull run will manifest. Best guess would be at least one or two quarters, and interest-rate expectations factored in.


fiveHedged LIQUID strategy doing well today…
Launched 1 week ago (five stocks, fully hedged, trades liquid S&P stocks only)…


Seems C2 still hasn’t fixed the dashboard profit/loss problem for you, I guess? On my dashboard shows -68k loss today …lol ( I know the other hedge system use to show that before as well)


TBH I sense our well-intentioned team at C2 are trying hard to maintain a reasonable level of service, but it is def not what it used to be. Not to mention the glitches with the dashboard (often lasting entire weekends), delayed fills, etc. Hopeful all this ‘streamlining’ will pay off in the end.


This is an interesting situation. In my analysis of the original fiveHedged from two weeks ago, it was clear that the cost of hedging so far has been dragging down results relative to periods of positive S&P performance, and that all the outperformance of the strat so far has been due to shorting S&P during downswings. The past two weeks (since my Jan 3 post) confirm this trend, with an additional -$4k in underperformance relative to the S&P 500.

The new fiveHedged LIQUID strategy is doing somewhat better… it has only underperformed the S&P by a bit more than $2k since it started Jan 3. And it’s trending upward; the original fiveHedged is down over that same period.

My conclusion remains that the cost of hedging here is very high in live trading, wonderful backtests notwithstanding. I would love to be proved wrong, but would suggest that a more prudent approach would be a more modest hedge (ie, less than 100%) that can smooth out the equity curve a bit, without ruining it altogether.


I was thinking of that too @v1Trader! Seems there still needs to be a bias to produce more profits.

Its still early but so far the C2 returns does not match the historical returns. But then the last 10 years has been more bullish than the last year.


The live trading record for fiveHedged (and fhLIQUID) is still very young. I am looking at the positions today, and see that the five stocks are outperforming the RWM hedge, which is the key objective…

As I said, its still early days, so [with the utmost respect] I cannot agree completely with your analysis, as we need much more [C2] sample data. Time will tell )


I am neither subscriber nor following at this time, and I have no access to current positions, I can only follow the trends I see reported by C2. And I love the hedged idea (tempered by my personal philosophy on perhaps using hedging more sparingly), so I’ll simply agree with you strongly that time will tell.


It’s a market-neutral strategy man. He’s always short the S&P but always long an equal amount of stocks. Any positive return over time is solely from his system stock picking. When you mention the ‘cost of hedging’ are you referring to actual trading costs?

Naturally, if the market rips 50% in a year he’s most likely going to underperform it, as the strategy is designed to have no beta. Likewise in Q4 he did well because the market tanked.

I like what strategy is trying to do because it is ALL alpha. So you can’t just say “well you just scalped a highly leveraged futures contract” or “you just rode a 3x ETF up with the market”.

It may not succeed but I appreciate what he is trying to do.


Precisely (wish I had the same way with words - but its all in the gray matter somewhere)… you hit the nail on the head - the objective of the strategy is to produce pure-alpha…

So, put another way…

(1) If the market (S&P) tanks, but the stocks “don’t tank as much”, then those are some strong(er) stocks than the overall market. So the root cause of that effect = stock picking.

(2) If the market rises sharply, and the stocks rise “slightly more”, then again those are some strong(er) stocks than the overall market. So the root cause = stock picking.

(3) If the market does better than the stocks (irrespective of whether we are in a bear or a bull market), then that results in a losing week or even few weeks (it does happen!), and I need to remain steadfast. Discipline. Discipline. Discipline.

I will always remain 100% hedged, because that is a core principle of pure-alpha.


BTW, both strats doing equally well today (fully hedged as usual)…



Thanks, yes, of course. I apologize a bit for being dense.

So on the whole, if we are truly market neutral, fiveHedged is up about 5% over the 2.5 months since starting, due to excellent stock picking, and with exceptionally low drawdown during a trying period in the market. Well done, @fiveHedged.

My earlier mis-analysis remains cogent in a limited sense. Compared to the S&P500 benchmark used on C2, fiveHedged outperformed as a whole, but differently in market up days than market down days. Possible explanations are likely something like this:

  1. During the market down periods, fiveHedged performed very well compared to S&P500.
    A) Due to picking stocks that went down less than the market average, or
    B) Due to hedging with a short IWM position that moved up faster than the S&P500 went down.

  2. During the market up periods, fiveHedged underperformed compared to S&P500.
    C) Due to picking stocks that rose less than rapidly than the market average, or
    D) Due to hedging with a short IWM position that lost value faster than the S&P500 gained value.

I won’t do the deep dive into which is what, but IWM did move down faster than SPY to the Dec 24 low, and has moved up faster than SPY since that time, so (B) and (D) certainly seem to play a role in my observations. When the S&P500 gets back up to 2659 where it was when the strategy started, we’ll have a better idea what the “pure alpha” return really is here. As IWM started around $147, perhaps it will be back right at $147 at that point (it should be close), making the comparison simpler. Hoping for the best here, really I am. But “pure alpha” is a theoretical construct; all real implementations have imperfections. But that equity curve looks very attractive.

Perhaps I can plead temporary insanity for my ignorance of the basic market-neutral setup here. After all, the title of the post is “Up 4% in 3 Days…”, not the kind of performance anyone expects to achieve in a market-neutral, unlevered stock-picking strategy (with a fundamental value slant, no less).

Again, hoping for great things here.

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