Innovative Ways to Hedge your Portfolio in This Market
Last week, I unveiled in great detail the results of an incredibly innovative and effective (IMHO) way to hedge a portfolio and provide double-digit annualized gains in any market (fine print: so long as there is not a prolonged multi-month sustained one-way trend). Thursday’s session was an excellent demonstration of what happens when you’re using Darwin’s paired short leveraged ETF strategy. In a down market day (S&P500 down 3%), the paired short pair portion actually gained $456. While this didn’t completely offset the losses in the long portion of my portfolio, it’s a nice contrasts to the red elsewhere on the screen that day.
The ultimate kicker though, is over time, the strategy’s in the green on both up and down days! Note how ERX and ERY (Direxion 3X Energy Index) are BOTH up on total gain to date? How? Read the background article for more, but basically, leveraged ETFs lose value over time due to daily rebalancing and they stink so bad as long term holds that they make for GREAT long term shorts. Now, guessing which one to short can be especially painful if you pick the wrong one, so shorting them together is especially beautiful. Again, the risk that needs to be managed is how to handle a runaway market that never reverses direction. There’s a remedy for that which involves options and is too complex to cover every iteration in advance – you’ve gotta react to each situation individually.
Message?
There are multiple ways to hedge your portfolio:
- Just buying a short ETF and holding it is not advisable given the value decay that occurs over time.
- Shorting stocks individually can be risky since you exposes yourself to unlimited losses (being short shares the day a takeover is announced and the stock runs 50% can be especially painful).
- Buying put options (see how puts and calls work) each month can get expensive, especially if the market meanders sideways or gradually upward.
By exploiting a known inefficiency in the horrid performance of leveraged ETFs, you can benefit from the deficiencies in these instruments by shorting simultaneously.
Disclosure: Short the following paired leveraged ETFs – ERX, ERY, FAS, FAZ, GLL, UGL
