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Hedge your small-cap portfolio with ETF!

2009 has proved to be a good year for most hedge funds dealing with fundamentals and I would expect the trend continues.
A fundamentalist take a closer a look at the firms with healthy balance sheet, attending the conference call and doing due deligence to understand the companies' business modes.
This has helped me to pay special attention to Chinese Small-Cap companies.
Most Small-Cap Chinese firms are ignored by investors because culture and disbelief of growth in China.
In my opinion, these firms are really good investment candidates with healthy balance sheet and almost zero debts. They are growing companies with Revenue growth >100% year over year, low p/E around 6-7 and high profit margin, >30%.
Although people may surpass these companies by tellling that "Chinese are liars and they cook the books", I regarded them to be good candidates and did my own research to identify the good ones.
The efforts always pay back and the good news is that it's easy to hedge the risks of these small-cap stocks by shorting the ETF.
For example, one ETF (NYSEARCA:HAO) is created for China Small Cap companies.
A  regression of CBPO agansit HAO gives a R2 >50%, which is pretty good for the model. A more caeful work has been performed for GFRE, YONG, etc and all suggest that the movements of these stocks are closely related to the index.

When you are not sure and worrying about your holdings of Chinese Small Cap companies, don't sell them immediately but short the index to hedge!

 

Disclosure: Long CBPO GFRE YONG