For those about to rock, we salute you – AC/DC
Dark Horse Hedge is Rocking On
With February and the most of earnings season passing, we decided to "stand up and be counted" with a summary article on the VIRTUAL Dark Horse Traders’ Hedge (DHH) portfolio.
Our mission has been to generate absolute returns through the use of a tilted Long/Short strategy that remains market neutral, but with a partial bias towards momentum (as defined by measuring the S&P 500 relative to its 50 and 200 day Moving Averages). We have been tilted to the long side since October 2010.
Over the long term, reasons for using such a strategy include being positioned to take advantage of both bull and bear runs. As evidenced by the near zero returns of the market over the last 10 years, buy-and-hold strategies are majorly flawed. The market also teaches hard lessons to those who attempt to predict direction, and has forced many retail investors to reconsider their strategies after being pounded in 2001 and 2008.
Alpha is a measure of a return over and above a benchmark index’s return, and Beta is a measure of the portfolio’s performance as it is correlated to movements of the market. With DHH, we strive to optimize Alpha while minimizing Beta to protect our portfolio in up and down markets. Beta is reduced by holding both Long and Short positions and using a rules-based approach to determine which stocks have the best chacteristics to benefit when the market is rising, and conversely to determine which stocks are most apt to perform poorly when the market is falling. In other words, we want to be long stocks of the best companies and short stocks of the worst companies – we want to identify the "tails" of a market, index, sector or basket of stocks.
Once a portfolio of Long and Short stocks is established, then it is a matter of gaining the desired exposure using the available tools, such as …