TH's buy & hedge system

[Trembling Hand]

Having said the above....

When I am designing something I try not to use preconceived ideas. I am distrustful of the statement "everyone knows". To give you some background I currently have a long-term portfolio that is based on blue chip shares from the ASX 200 with over ten years of history. Whilst I do not hold 200 stocks in that portfolio, it is balanced against the ASX200 index - requiring a weighting that you've stated is ridiculous...yet it meets the goals that I have set for that portfolio. It works very well for what I am trying to achieve.

The answer to that question from my perspective is...perhaps. It depends upon the power law and level of return that your strategy operates under. If your system compounds gains, then it only takes very small gains over a ten year period to make it more than worthwhile to expose yourself to a single outsize risk depending upon the frequency of that event. Unfortunately without data it is a moot question.

You've mentioned trading, but what I am seeing is not a "trading" system as I would normally define that. It's kind of a hybrid. You are buying and holding the core portfolio. You are not trading the core portfolio, seeking instead to profit in other means, so the question to me is why are you applying traders rules rather than fund manager rules? Is it of benefit to do so?

Sir O you haven't convinced me in any way.

Counter these points.

Even if i did have backtesting results that remove the survivorship bias of using current weightings. Will the last 10 years be the same as the next 10? Good bet would be no?

That aside the weightings question is really a coin toss. Its just as likely that NCM will outperform BHP. In that case being weighted to the index will be a huge drag rather than benefit. You can in no weigh assume that being heaver into one stock will not benefit or degrade performance. But you can be sure that its skewed your risk.

Therefore unless you have a crystal ball and ensure me that BHP will not buy Xstrata at the next top or NAB buy AMP or a Super Tax on WOW etc etc I'll pass on a coin toss and be happy to reduce portfolio risk. That's my thinking.


The hedging can be fine tuned to the portfolio with a few extra oppies.

 

[trainspotter]

Hence my comment on only -1% capital ?? Call is at 4200 for mine before upward trend. Bit more pus to be squeezed out of this boil before the "story tellers" come out to play.

I wonder what the "story tellers" announced at 11.15am today? Sorry I was a bit off at 4188. How did the hedge go TH ??

 

[Trembling Hand]

I wonder what the "story tellers" announced at 11.15am today? Sorry I was a bit off at 4188. How did the hedge go TH ??

No hedge on. I'm currently out of sync with the system up to today. Tonight's buy signal hopefully puts me back in the grove. As stated last week was expecting falls into today & Monday but not by this magnitude thats why I failed to hedge. Next action will be either hedging if we fall below today's/Mondays low because the market are not acting accordingly to my signals. Or hedging after we rally and I get a sell signal.

The rally @ 11:15 was following China.

 

[trainspotter]

Keep us posted on the progress. System looks good thus far but needs like you say, a bit of fine tuning by hedging the portfolio with a few extra oppies. China is saving our bacon again.

 

[Sir Osisofliver]

Sir O you haven't convinced me in any way.

Have I at least convinced you I'm not being a pr!ck and we can discuss these things calmly?

Counter these points.

Even if i did have backtesting results that remove the survivorship bias of using current weightings. Will the last 10 years be the same as the next 10? Good bet would be no?

Would they be perfectly aligned? Of course not but this is not the crux, the question is will it be different enough. The more things change the more they stay the same. You are talking about a strategy that is based upon regression towards a mean. Market is overbought, put hedge in play, make money as market returns to mean. Market is oversold, remove hedge and allow to return to mean. Correct?

So is there a reason to suspect that the market swings from a percentage standpoint will differ significantly from the past ten years? I think - I'll even take an educated guess that the answer to that question is no.

That aside the weightings question is really a coin toss. Its just as likely that NCM will outperform BHP. In that case being weighted to the index will be a huge drag rather than benefit. You can in no weigh assume that being heaver into one stock will not benefit or degrade performance. But you can be sure that its skewed your risk.

TH I'm not sure if I'm going to express this correctly - here's a crack at it however, I'm trying to multi-task when writing these responses to you and I only have a short period of time to write this before I have to do something else.

Your strategy is using the ASX20 (largely). You've said you'll use an index to hedge rather than hedging each stock. Fair enough, I get it. Buy one instrument rather than 20, cuts down on your costs and makes the strategy simpler and faster - all great and highly important characteristics to ensure your strategy makes money.

These 20 stocks account for an appreciable percentage of our entire market. Our market indicies works on an aggregate basis - which is what your hedge is working from. The individual stocks being as they are from a range of sectors will not move perfectly in lock-step all the time. Different sectors and stocks will have different periodicity and amplitude and differing correlation with each other.

Since you are not individually hedging the contents of the core portfolio, these individual swinging incidents are irrelevant because you cannot take advantage of them with your chosen hedge. Only the aggregate performance of the index will determine when you place your hedge. By selecting a fixed percentage of funds into each position, rather than a weighted one, you are introducing a bias into your strategy that does not exist in the aggregate hedge you are using. Just as I "can in no way assume that being heavier into one stock will not benefit or degrade performance." You cannot assume that the bias you have introduced will have no effect and may actually increase your risk and potentially degrade your return.

Therefore unless you have a crystal ball and ensure me that BHP will not buy Xstrata at the next top or NAB buy AMP or a Super Tax on WOW etc etc I'll pass on a coin toss and be happy to reduce portfolio risk. That's my thinking.

The hedging can be fine tuned to the portfolio with a few extra oppies.

I'm running out of time here TH - but as I said before, you're not trading these things individually - it's more like funds management portfolio, you may actually be increasing risk - but unless you test for it you'll never know.

Cheers

Sir O

 

[Trembling Hand]

Sir O

I see what you are getting at but your coming at it from the wrong angle.

Ideally you would construct a bunch of stocks with equal weighting or even try and pick some winners while using 'normal' position sizing. Then use options on each stock to hedge effectively creating your own index and hedging requirements.

The problem is the hedging with the spi is far more practical and cost efficient that using what is available with ASX options. As I have already stated. Directly hedging with individual options is simply BS. It don't work not with the market we have. Unless you have specific skills along the lines of the oppies guys like Wayne you will be cut to bits thinking you have a effective short hedge but what you will end up having is a time decay, high cost, large spread bunch of illiquid instruments controlled by the MM.

Even with the skewed SPI weightings my guess is that it will still bet my option strategies skills. (at the moment)

 

[tech/a]

Not Thinking of filling the portfolio T/H?

 

[Trembling Hand]

Not Thinking of filling the portfolio T/H?

Nope. you?

 

[tech/a]

Nope. you?

No
My thinking on this period is here.

https://www.aussiestockforums.com/forums/showthread.php?t=4888&page=404

 

[Trembling Hand]

No
My thinking on this period is here.

https://www.aussiestockforums.com/forums/showthread.php?t=4888&page=404

Yep, no reason to be wildly bullish. IMO.

 

[Sir Osisofliver]

Sir O

I see what you are getting at but your coming at it from the wrong angle.

Ideally you would construct a bunch of stocks with equal weighting or even try and pick some winners while using 'normal' position sizing.

TH I'm confused. Is your system a) a long term core portfolio using expert stock selection and the use of a positional sizing model; or b) the use of a swinging index hedge placed against a core portfolio according to your system rules to manage downside risk and create wealth utilizing weighting of the hedge? Or c) both

If you are trying to do both, how do you then apportion the winnings or losings? How do you determine the probability of success or failure of the strategy?

Lets say your system makes $10,000.00 in the first week. Of that $10,000.00 what portion is attributable to your stock selection and what portion to your hedging activities? Is that ratio constant or static?

This is similar to the problem of points or division of the stakes worked out by Pascal and Fermat when they were working out the laws of probability.

I suppose what I'm getting at TH is the number of variables you have introduced in your testing with no control mechanism to test your theory.

Then use options on each stock to hedge effectively creating your own index and hedging requirements.

The problem is the hedging with the spi is far more practical and cost efficient that using what is available with ASX options. As I have already stated. Directly hedging with individual options is simply BS. It don't work not with the market we have. Unless you have specific skills along the lines of the oppies guys like Wayne you will be cut to bits thinking you have a effective short hedge but what you will end up having is a time decay, high cost, large spread bunch of illiquid instruments controlled by the MM.

Even with the skewed SPI weightings my guess is that it will still bet my option strategies skills. (at the moment)

I don't disagree with any of the above. In fact I've already applauded your use of a single instrument to hedge with because it cut down on time decay, costs etc.

I hope this post expresses better the concept I was trying to get across on Friday

Cheers

Sir O

 

[Trembling Hand]

lol!! Sir O I have no further comment to someone wanting back tested rolled gold confirmation that they will make $10,000 next week.

 

[Sir Osisofliver]

lol!! Sir O I have no further comment to someone wanting back tested rolled gold confirmation that they will make $10,000 next week.

TH did you even read my post?? Forget the time period and dollar amounts I mentioned. I just used a week and a nice round number for you as an example. Feel free to replace that figure with any number between -$1,000,000 and +$1,000,000 or better yet replace it with the letter X and replace the time period with Y.

It still doesn't change the question I posed. How much of X is attributable to your position sizing and how much to your hedging activities over period Y?

Do you know why this is important?

Cheers

Sir O

 

[Trembling Hand]

I understand why these threads die after 40 post.

this is discretionary long term wealth building approach using my skills to take money out of the swings and put it into a portfolio of div paying shares + collect the franking credited income. While not adding to Krudds income.

The idea is to take profit B and add it to holdings A. Portfolio A will not be liquidated therefore there is no profit A to report on (besides divs (less tax on profit B))


.

 

[tech/a]

Sir O

In the longterm scale of things While you could tweek the hell out of any method.
The simplicity of T/Hs approach is and will be easy to follow.
Sure both he and others may well have some suggestions as it is traded (forward tested).
Hes made it clear its not been tested.
The theory at least is in my mind and his credible.

But I'm with T/H keep it simple and see where it goes!!

Im sure a lot will be gained in knowledge.

 

[Sir Osisofliver]

Do you know why this is important?

Cheers

Sir O

I understand why these threads die after 40 post.

this is discretionary long term wealth building approach using my skills to take money out of the swings and put it into a portfolio of div paying shares + collect the franking credited income. While not adding to Krudds income.

The idea is to take profit B and add it to holdings A. Portfolio A will not be liquidated therefore there is no profit A to report on (besides divs (less tax on profit B))


.

I'll take that as a no.

Good Luck TH

Cheers

Sir O

 

[tech/a]

Any changes here or is the portfolio still half filled and long?

 

[Trembling Hand]

Nope no changes. All going as expected. At a guess there could be a hedge sign coming late next week. Other than that will have a protective hedge stop under current lows.

 

[skc]

China comes to the rescue today. They started this mess and now have been ignoring the falls the last few days by rallying into the close. Looks to be doing the same today but from their open.

Buy signal will be triggered tonight.

Hmmmm!

Is it time to put a hedge on yet?

 

[nomore4s]

Is it time to put a hedge on yet?

Why would you be putting a hedge now?