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Comments (11)

Z-alpha Trading System profile picture
@HPBunker - Our portfolio structure is that of a core-satellite, with the "satellite" being the hedging engine and the forever hold assets making up the "core" portfolio frame. This structure, consequently, makes us bona fide hedgers.

Systematic risk and idiosyncratic risk are different. Hedging mitigates the idiosyncratic risk and does nothing to keep core portfolio constituents from exposure error.

Profits from hedging success (satellite) are deployed to purchase more assets (core) at depressed prices. This is the simple explanation as the system does this total process and asset accumulation and position sizing (hedging) are included in the execution protocols.

The system is dynamic, and the course of action last month was elucidated in a down-trending market, and the S&P 500® is currently in an up-trending market, within a consolidation frame.

We hope this adds value.
Z-alpha Trading System profile picture
@Phenom1 - There are a whole slew of reasons why we would never use the mentioned portfolio structures, which is way beyond the scope of this missive. But one rationality is the S&P 500® trends up approximately 70% of the time, and this directional advantage has to be exploited at all times. In return, making idiosyncratic risk much easier to quantify and mitigate, which is so important.

A core portfolio of quality stocks will take care of itself, always has, always will, and by "reducing" portfolio stock exposure with an all-weather approach will create opportunity loss risk.

However, the portfolio structures illustrated by the author works for them and many others and that's all that matters.

Note: Currently, approximately 75% of daily transactions are machine-driven. As we've written before, in 2-3 years, it will be 90%. This reality will only enhance the above stated directional advantage.
@Z-alpha Trading System

"A core portfolio of quality stocks will take care of itself, always has, always will, and by "reducing" portfolio stock exposure with an all-weather approach will create opportunity loss risk."

I thought you actually layered on hedges as the market rose, and removed them as it fell. I remember your posts in March stating as much. Do hedges not effectively reduce portfolio stock exposure?
Logical-Invest profile picture
The Hedge substrategy had in fact the same return as the S&P500 over the last 5 years and this with a mostly negative correlation, so adding it to equity can not be summarized as “opportunity loss”.
Phenom1 profile picture
@ Logical Invest - How much does a subscription cost in order to get these two strategies in real time?
Gary Jakacky profile picture
Similar to a strategy that I have, 3 buckets. Bucket (1) is nothing but high quality A++ or A+ financial rating with decent dividends (close to 4% right now) much like Value Line portfolio 2; Bucket (2) is shorter term trading of stocks with good growth potential (basically value line portfolio 1) ; and bucket 3 is for options premiums, spreads, and such. The last two portfolios are mostly cash most of the time; and reduce overall volatility. And they prevent you from 'panicking' about portfolio one, which is by no means immune to sharp selloff.
I would use IEF (7-10 year Treasury), rather TLT, and I would hedge that with IVOL (rises when 1. Long rates rise, 2. Inflation rises, think TIPS). IEF will be less volatile than TLT, obviously, as we see today (issuing 20 year). IEF/IVOL I think would be balanced around 4 to 1 respectively.

And you can sell cash-secured Puts or do covered Calls on IEF to decrease cost and make a few extra %.

I'd do no more than 10% in gold because a currency crisis is questionable at this point, no more than 10-15% in SPY until the smoke clears, too many corporate unknowns, the rest split between, cash,IEF, and IEI.
Algyros profile picture
Thanks for the article. Another possibility is to invest in TLT, QQQ, and GLD using an adaptive allocation (or equity parity) strategy.
Portfolio Ninja profile picture
Yep, this works really well. However, I feel using QQQ over SPY is somewhat cherry picking the results :)
Patrick Hill, LI profile picture
It actually chooses the equity component each month between DIA, QQQ, SPY and SPLV based on volatility adjusted performance over the previous month.
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