High Beta Investing - Experiences And Thoughts

Dec. 02, 2012 6:44 PM ET
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Long Only, Momentum

Contributor Since 2008

Started a career in civil engineering, but switched to project finance and then fund management. Now researching the timing of persistent trends in commodities and industry sectors with the aim of improving the performance of high conviction portfolios.

I am taking an opportunity to share some experiences in relation to my last article.

I have been running a ghost portfolio on my High Beta strategy. This portfolio is run through a third party portfolio tracker which buys and sells specific volumes of stock on instruction, charges brokerage and is subject to execution risk - a complete virtual broker. Therefore, the results can be trusted as good approximations of what would have happened to my account had it been real cash.

In respect of testing the "Indicator", to cut along story short, the real time application appears worthwhile, but it cannot be assumed that immediately the "indicator" goes one way or the other, that the High Beta strategy will automatically start to perform or underperform. I have found that there are lags of up to two weeks for a portfolio to kick in with performance. This of course puts a strain on an impatient investor, but I am still OK with using "Indicator" as my primary source for timing. I also look to other indicators published on SA in terms of market breadth and the like, and take some comfort from them as supporting evidence. More on that later.

My first strategy was to use this as a ratchet strategy. Get in, reap High Beta rewards, then go to cash and wait. My best return was around 12% absolute over about three weeks, which equated to around 7% alpha. I then went to cash when my selections started to lose ground, and as the market overall declined, alpha actually hit 12% at a maximum.

"Indicator" then went negative and so I tested a Bear ETF, HDGE, on the basis that the market should decline further. This may have been a good idea, but the choice of ETF was bad and it wiped out about 5% or return. In fact I now think that it is not such a good idea to try for returns on the short side because, in that period of lagged performance mentioned above, the exposure to adverse returns is too great. I might have different thoughts if we had a period of market turmoil, but at the moment, stocks appear to be trading on merit more so than on herd instinct.

As always, stock selection isn't perfect. However there is no point looking all over the market for stocks going up. I am still OK with selecting a panel of High Beta stocks and continually screening to see which are performing as expected. To the extent that I am focused, it is on that.

Where there appears to be a good story, say as in oil shale, then I think it also a good idea to monitor stocks which might benefit, and wait for a sign of life, but that is another parallel strategy.

At the moment "Indicator" is oscillating around zero, which means I am in cash only, and in the past week it has also cost a few % in performance...but getting a better understanding of how to operate the system is what this is all about.

Finally, it is worthwhile considering what makes High Beta stocks. Are they originally deep value, are they being re-rated, are their earnings improving markedly. Whatever it is, a proper classification may assist in improving the selection process going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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