ikkyu

Let Warren Buffett Handle Your Portfolio

[Initially published at World Beta]

Greeting Folks,

I am a huge fan of Mebane's stuff and this site has taught me a lot. Thus, I just want to go through an example to see if a pure alpha extraction of a Buffet port is going to work.

Here is how I break it down with today's numbers for a $100,000 port on prices and margin for today. Consider two options. The first might be buying SPY one year at-the-money options. Right now, they would cost about 15% of the port and that is only with a delta of 50 (i.e. an imperfect hedge). You could use emini S&P futures. You would need about 2 and a quarter contracts and your initial maintenance margin would be $13,923( at Interactive Brokers), or roughly 14% of the port, if you could have fractional contracts). You would be asked for more margin if the trade was going your way. You also lose about 1% a year for yours service and there are the trade transactions. I don's see how this is going to work. 3:1 leveraged ETF would require at least 33% of the port (and would work horribly).

Your example had a 50% hedge so that would require about 7.5% of the port value to hedge with a return of 7.4%? Whoops…. You would be at least minus 1% with your service fee. That is assuming your hedges went well (they aren't always so tidy).

I would take a good look at the alpha extraction sales pitch. It doesn't seem to add up to me. Am I missing something?

Cheers from Osaka,
john