Another Hedge Experience

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Reader David emailed and had this to say about the recent discussion about the use of the SimpleHedge Strategy:

I have enjoyed your weekly newsletters and daily blog for some time. Thank you for sharing your knowledge and wisdom. I noticed a recent blog from ‘Foster’ concerning your simple hedge strategy where he used mutual funds as the long position. Some readers commented about using ETF funds.

Maybe my simple hedge will be of help to readers wanting to use ETF funds.

I set up my hedge on March 23 with 20% of my portfolio as follows;

10% in SH purchase price $75.69
5% in VBR (beta 1.22) purchase price $35.94
5% in VOE (beta 1.20) purchase price $29.33

as of 4/16/09 SH=-5.88%, VBR=+11.8%, VOE=+10.16%, Total hedge= +2.87%

I’m using ETF funds so I don’t have to worry about trading fee’s etc. I pay $8 per ETF trade.

I hope this helps some of your readers who may want to use ETF funds with the simple hedge.

To see what he has actually done, let’s look at my matrix again:

[Click on table to enlarge]

We have a slight discrepancy in total return, but that’s really not that important. What matters is that David has applied the hedge concept successfully to ETFs, since that is what he prefers using for his investments.

It does not really matter whether you use ETFs or no load mutual funds, as reader Foster described. What is important is that both understood the concept and applied it correctly.

I really have no preference either way, since my testing has shown that during some periods in time, ETFs prevail over mutual funds and vice versa.

I will continue tracking these two examples to show how they will fare in different market conditions.

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Comments 3

  1. Ulli,

    Wouldn’t it just be so much easier to buy SH when your TTI moving avg. line turns down and stay in that position until the TTI moving avg. line turns up and buy ones own favorite long funds or ETFs and stay in that position until the TTI moving avg. line turns down again and repeat the process? Based on my back-testing it looks like it works great and eliminates almost all of those pesty whipsaws going back many years and at the same time increases the compounded annual growth rate.


  2. TM, We had discussions about that before. While this may work for readers who are more aggressive, it won’t work for those with a conservative risk profile.

    The reason is that the draw-downs are too high and you will be giving up too much in profits and while exposed to extreme volatility.

    If you’ve done some back testing, feel free to email me your results if you like.


  3. Ulli:
    I can understand TM's process, you have to "let the dog run" either up or down. I use ETFs with buy stops & sell stops so if the market is going up I set buy stops for the short ETFs at 3-4% higher than the previous day so if (like today) the market drops the shorts will be bought & some of the long ETFs will be sold when there is a total drop of 7%. After the shorts are bought I set a sell stop on them at about 4% lower so if the market reverses we are out of the shorts once it goes back up 4%. If the market keeps droping (and therefore the shorts keep rising in price)I reset the sell price just like you would do with the longs.


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