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


As is expected. On any given day:
-Market up 2%? Unless he has 2% of alpha IN A DAY there is no way he can outperform an equity index.
-Likewise, market down 2%? Unless he craps the bed with his stock picks there is no way he should underperform an equity index.

The pure alpha return is whatever his system has returned thus far. Plain and simple.

The only reason to compare this to the S&P or any other index (Russell 2000, etc) would be solely for risk/reward trade-off analysis (sharpe ratio, etc) over time.

(caveat: I am not an investor nor am I promoting this strategy) :cowboy_hat_face:


But the backtest shows 70% annual gain with 10% draw down. I’m not surprise a fully hedge strategy will have a 10% drawdown unless we are in an 08 crisis. Because anybody can Buy weekly puts as hedge, prob way cheaper than short 100% of acct value of IWM.

I’m still waiting to see this 70% gain while fully hedge unicorn.


Can you give a working example of a put option which is hedged 100% of the time against a long portfolio, 52 weeks of the year. True cost vs IWM? I respect your view but it is easy to say its cheaper. Can you elaborate? Eg., if I am $50k long stocks, how many put contracts, cost inc both intrinsic+time value, x 52 weeks. Total?

I ask only bcz if I can truly hedge 100% market-neutral cheaper than IWM (or long RWM), then I need to take a look. Please explain your statement with some detail. Thanks.


I doubt it. The time decay on buying 100% hedged put options on a weekly basis would destroy your return.


Maybe I’m thinking about it wrong, and feel to correct me if I am, but the way I understand this strategy is that if he really has a source of alpha and he’s picking good stocks, then these stocks should outperform a market index during down times, and should also outperform when the market is rising. He shouldn’t be giving up anything versus the index, regardless of whether or the index is going up or down. We keep referring to the RWM position as a hedge, and we talk about hedges we think of it as a cost - I think a better way to describe this strategy is that it’s a spread-trading system between his stock picks and the index, not a hedge…the idea is his picks outperform under all conditions against the outright index, and the outperformance compounds over time.

The way he’s represented the 60% annual return is with 2x leverage, but with no leverage, which is how I would think most people would want to look at it, it’s 30% return. S&P has returned something like 14% annually more or less over the past 10 years. So, he’s claiming a 15-16% outperformance, or 2x the annual performance of being passively long the S&P. That sounds a lot more reasonable than when it’s presented as 60% CAGR.


you are right, maybe weekly is too expensive. prob close to 20% of annual cost. I looked that $spy monthly ITM put is about 1% cost. Buying 2 put per 100 shares of $spy to be delta neutral. So annually you looking at 15% to buy puts depend where vix is at the time. a huge variable factor.

the general “hedge” model, not this strategy there is a few issues or huge variable factors. 1. the stock picking, you are rely on pick 5 stocks that will out perform the index. I’m just looking at the 5 recent closed trades. 4 of the 5 under performed $iwm on 1 month time frame. 2nd variable is cost of margin to short 100% of the account balance shorting $iwm. 3rd issue is time of double negative. at times there will both side of the trade is going the same direction. when the 5 stocks are going down while $iwm is also going up. 4. cost of margin being 100% hedge, or some contango long inverse IWM fund.

I’m not trying to be the only betty downey here. but if its as simple as shorting an index 100% of the time can outperform any benchmark and prevent large drawdown, wont any funds or institution all be doing this ? to have this style of management to be consistent over a long time it requirement perfect stock picking and perfect timing. I’m just skeptical anybody can be this good over a long time frame.


Shorting an index 100% (and being long 100% stocks at the same time) will only outperform if his stock picks are consistently winning. The beauty of this is you can see instantly, daily, by how much he is and it should be uncorrelated to any other asset class.

There were 130/30 funds out there before 2008, that would buy 100% stocks, short 30% of the index (max allowed I believe) and buy another 30% stocks to get them back up to 100% exposure. Most of them did worse than crappy because a) stockpicking is tough to begin with and b) when the market crashed everyone went to indexes for safety so the indexes actually did better than expected.

You and me both. But so far so good. We shall see.


Sure, they could. That doesn’t mean it’ll work for them. The long stocks have to perform as well. I think that’s what fiveHedged is claiming here: the way his cash flow model is picking stocks results in a portfolio that has beta >1 when the market is rising and beta <1, or maybe even negative beta, when the market is declining.

We keep debating whether or not this performance is possible. One of us should do a back of envelope test: go back to whenever his backtest starts, pick the best performing stock in the stock market for the upcoming year (with benefit of hindsight), and then go long that stock for a year while shorting the SPY in equal dollar amounts. Repeat for each year in the backtest and see if it’s even within the realm of possibility to get a 30% CAGR.


The fiveHedged strategy ranks every stock (above mktcap $250m and avgvol>50k) weekly, based on a cash-flow valuation method I developed which takes into account the free-cash-flow (FCF) with normalized capex vs each companys historical FCF-equilibrium (like a mean reversion of the FCF-formula), also factoring in across-industry comparisons. Additional safety-checks are applied to qualifying companies such as Piotroski score, balance-sheet debt/capital, revenue and gross-margin sustainability etc.

What this effectively means are few stocks the method finds ‘temporarily’ undervalued. The trade usually lasts 5-10 days (fiveHedged only) before a stock (provided it moves higher as expected - which is not always the case) becomes too ripened to carry. So, picking a best performing stock for the upcoming year (with benefit of hindsight) would not work as it completely ignores the valuation model.

NB: fiveHedged LIQUID works on similar principles, but the carry is longer, averaging 30-35 days.


The idea would just be to validate the claim that 30% CAGR is possible using a spread trading stock picking strategy. I used an extreme example to try see what the conceivable upper boundary might be.


I am still unsure how this would work - but benefit of the doubt, I can check the sim to find the top performing stock for each year since 07 for both fH and fHLiquid - let me know if this would help, I can send it to you later today.


I meant it as a hypothetical semi-rhetorical to prove a point. You don’t need to do any backtesting.


fiveHedged Original (All-Market) re-entering record new-high territory. Remember this is a ‘fully-hedged’ pure-alpha strategy.

fiveHedged Liquid ‘New Record High’ Today. All-Time Up 4.6% (22 Days). Also a ‘fuly-hedged’ pure-alpha strategy…


Thought I would share…
New Record High for fiveHedged (five stocks/week, fully hedged)…


The liquid version is not performing very well this week. Did you select the wrong stocks?


Occasionally you are going to get a bad week…



Thanks for the update. So I guess the stock picking criteria is very important part of the equation in your strategy?


Yes stock picking is focal. But it is not the only criteria for long term success. This is only achievable IMO through proper risk management (hence the hedge). My goal is to outperform the broader indexes (Dow, S&P, Russell, Nasdaq etc) - aka ‘pure-alpha’ rather than just develop stock-picking algo’s, which is the reasoning behind the long-stocks/short-index positioning.


fiveHedged motoring on - one of the best weeks so far - new record high - long stocks proving to do just as well as RWM hedge…

Fully Hedged ‘Pure Alpha’ Strategy (Max 2x Margin)


100% Profitable Months so Far. Maximum Drawdown in 4 Months = -3.8%

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