Go to Jeff Salisbury LWGate Home Page.From: Gene Ricci <genr@swbell.net>
Subject: Re: [CANSLIM] Hedging
Date: Thu, 16 Jan 2003 17:24:35 -0600
Previous Article (by Subject): [CANSLIM] Hedging "Edward W. Gjertsen II"
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Ed, is the ProFund .. 2x leveraged ... meaning that your 10% position =
was really 20%?
Thanks for your input,
Gene
----- Original Message -----=20
From: Edward W. Gjertsen II=20
To: canslim@lists.xmission.com=20
Sent: Thursday, January 16, 2003 5:03 PM
Subject: [CANSLIM] Hedging=20
Hedging comes in all shapes and forms. We hedged our current position =
2 days ago by utilizing a 10% position in the ProFunds Ultra Short OTC =
fund. A 2 beta inverse fund. As we currently manage ERISA accounts in =
our portfolios - standard short positions are not allowed. Going into =
this weeks earnings and owning EBAY, SYMC, GRMN, VIP and one biotech =
stock, we felt for the first time the need to hedge. Theoretically the =
ProFund Ultra Short will provide a 200% gain on any losses occurring in =
the Nasdaq 100. . Even with the rebalancing, we feel the Nasdaq 100 has =
sufficient weighting in Tech to help offset positions=20
Yesterday the fund was up 3.89% and will be up some today (1/16/2003). =
We were lucky to get such good performance from SYMC today. A hedgers =
dream; make money on the hedge and on the underlying portfolio. Happens =
too infrequently to be giddy.
We were not looking for a dollar for dollar offset, just a way to =
protect some profits if weakness occurs. Those of you that follow =
tradingmarkets.com know many of the traders were looking for a period of =
weakness to occur starting two days ago. We will lift our hedge when we =
believe the market has stabilized, this of course is a "gut" call. =20
Prosperous investing to all.
Ed Gjertsen II
ed@macktracks.com
-----Original Message-----
From: Gene Ricci [mailto:genr@swbell.net]=20
Sent: Thursday, January 16, 2003 4:27 PM
To: My Friends
Subject: Can We Make Money Hedging ???? - Maybe So.... Come to the =
next VectorVest Meeting - January 25th and see
Yes, we're going to discuss how to use VectorVest to 'hedge' at the =
next meeting, January 25th.
Please do some advance reading so that the session will be more =
meaningful for you.....=20
Hedge
Making an investment to reduce the risk of adverse price movements in =
an asset. Normally, a hedge consists of a protecting position in a =
related security.=20
If you owned a stock, then short selling an equal amount would be a =
hedge.=20
This strategy is used when you are unsure what the market will do. A =
perfect hedge reduces your risk to nothing (except for the cost of the =
hedge).=20
Hedge Fund=20
An aggressively managed portfolio taking positions on safe and =
speculative opportunities. Most hedge funds are limited to a maximum of =
100 investors. For the most part hedge funds are unregulated because it =
is assumed the people investing in these are very sophisticated and =
wealthy.=20
Don't be fooled by the name, true hedging refers to reducing risk, but =
many hedge funds use options, short selling and any other strategy to =
increase leverage and get a maximum rate of return.
On the other hand, because many hedge funds use futures, swaps, and =
arbitrage strategies you could argue that they diversify away some of =
the investor risk from the stock market.=20
Long/Short Equity=20
A hedge fund strategy that involves buying certain stocks long and =
selling others short. There usually isn't a restriction on the country =
that the stocks trade in either.=20
This type of hedge fund basically has free reign to buy or sell what =
it likes. A long/short equity hedge fund is usually considered to be =
higher risk.=20
Equity Market Neutral
A hedge fund strategy that seeks to exploit differences in stock =
prices by being long and short in stocks within the same sector, =
industry, market capitalization, country, etc. This strategy creates a =
hedge against market factors.=20
It's the ultimate strategy for stock pickers because stock picking is =
all that counts. For example, a hedge fund manager will go long in the =
10 biotech stocks that should outperform and short the 10 biotech stocks =
that will underperform. Therefore what the actual market does won't =
matter (much) because the gain/loss is offset by the other. If the =
sector moves in one direction or the other, the gain on the long stock =
is offset by a loss on the short.=20
Market-Neutral Equity Style Investment (example)
The main objective of market-neutral style of investment is to =
minimize market and sector risk by buying stocks, which are expected to =
outperform the market, and selling stocks short, which are expected to =
under perform the market. This style offers the chance to make positive =
investment returns in a down market as well as in up market. =
Theoretically, when long and short positions are equally weighted and =
securities are paired for each sector then the market-neutral style =
should render the portfolio insensitive to market risk. Pairing of =
stocks is done to match long and short position for each sector =
separately to cancel out risk associated with each position. Goal of =
market-neutral investment style is to keep market exposure as little as =
possible. Market exposure of a portfolio can be measured by the =
following formula:
Market exposure =3D Long exposure - Short exposure
Capital
In practice there are always some uncovered risks, mainly stock =
selection risk, trade execution risk and market risk of unhedged =
positions. In addition, hedge positions may not completely eliminate =
market or sector risk. Therefore, active management is required to =
adjust positions regularly and keep portfolio in line with acceptable =
market exposure. Our attempt will not be to eliminate market risk but to =
minimize it by keeping low value of market exposure.
Selection of stocks will be based on anticipated price performance =
relative to the other stocks of same sector that is selecting leaders =
and laggards. Portfolio will buy stocks of leaders, which are =
anticipated to beat the market and sell short stocks of laggards, which =
are expected to lag behind.=20
To effectively implement investment style, the main focus will be on =
mid and large-cap stocks of large float and high trading volume. Up to =
10 percent of the portfolio may consider opportunities in small-cap =
stocks.=20
When a sector is in up trend, portfolio holdings will be bias towards =
long positions. Consequently, in the downtrend, portfolio holdings will =
be bias towards short positions. Timing of initiating long and short =
position may vary based on sector trend line. Therefore, at times there =
may not be any hedge for a particular position in portfolio.=20
Portfolio may sell covered options on any long or short position when =
total annualized return (option premium plus profit in stock, if Called =
or Put) results in at least 30 percent or better.=20
All short positions in stocks, if not hedged, will carry a STOP Loss =
GTC order at all times. Initial STOP Loss order will be placed between 5 =
to 15 percent loss level based on stock volatility and technical =
indicators.=20
Links to other articles on hedging:
http://invest-faq.com/articles/strat-hedging.html
=20
Hedge Ratio
http://www.investopedia.com/terms/h/hedgeratio.asp
=20
Basic Risk
http://www.investopedia.com/terms/b/basisrisk.asp
Portfolio Insurance
http://www.investopedia.com/terms/p/portfolioinsurance.asp
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<BODY lang=3DEN-US vLink=3Dblue link=3Dblue bgColor=3Dwhite>
<DIV><FONT face=3D"Comic Sans MS">Ed, is the ProFund .. 2x =
leveraged ...=20
meaning that your 10% position was really 20%?</FONT></DIV>
<DIV><FONT face=3D"Comic Sans MS"></FONT> </DIV>
<DIV><FONT face=3D"Comic Sans MS">Thanks for your input,</FONT></DIV>
<DIV><FONT face=3D"Comic Sans MS">Gene</FONT></DIV>
<DIV> </DIV>
<BLOCKQUOTE dir=3Dltr=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3Ded@macktracks.com href=3D"mailto:ed@macktracks.com">Edward =
W. Gjertsen=20
II</A> </DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Thursday, January 16, =
2003 5:03=20
PM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> [CANSLIM] Hedging =
</DIV>
<DIV><BR></DIV>
<DIV class=3DSection1>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">Hedging comes in all shapes and =
forms. We hedged our current position 2 days ago by utilizing a =
10%=20
position in the ProFunds Ultra Short OTC fund. A 2 beta inverse=20
fund. As we currently manage ERISA accounts in our portfolios =
=96 standard=20
short positions are not allowed. Going into this weeks earnings =
and=20
owning EBAY, SYMC, GRMN, VIP and one biotech stock, we felt for the =
first time=20
the need to hedge. Theoretically the ProFund Ultra Short will =
provide a=20
200% gain on any losses occurring in the Nasdaq 100. . Even with =
the=20
rebalancing, we feel the Nasdaq 100 has sufficient weighting in Tech =
to help=20
offset positions </SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue"></SPAN></FONT> </P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">Yesterday the fund was up 3.89% =
and will=20
be up some today (</SPAN></FONT><FONT color=3Dblue size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">1/16/2003</SPAN></FONT><FONT =
color=3Dblue=20
size=3D2><SPAN style=3D"FONT-SIZE: 10pt; COLOR: blue">). We were =
lucky to=20
get such good performance from SYMC today. A hedgers dream; make =
money=20
on the hedge and on the underlying portfolio. Happens too =
infrequently=20
to be giddy.</SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue"></SPAN></FONT> </P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">We were not looking for a =
dollar for=20
dollar offset, just a way to protect some profits if weakness =
occurs. =20
Those of you that follow tradingmarkets.com know many of the traders =
were=20
looking for a period of weakness to occur starting two days ago. =
We will=20
lift our hedge when we believe the market has stabilized, this of =
course is a=20
=93gut=94 call. </SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue"></SPAN></FONT> </P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">Prosperous investing to=20
all.</SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue"></SPAN></FONT> </P>
<DIV>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: blue">Ed Gjertsen =
II</SPAN></FONT></P>
<P class=3DMsoNormal><FONT face=3D"Times New Roman" color=3Dblue =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; COLOR: =
blue">ed@macktracks.com</SPAN></FONT></P></DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3DTahoma =
size=3D2><SPAN=20
style=3D"FONT-SIZE: 10pt; FONT-FAMILY: Tahoma">-----Original=20
Message-----<BR><B><SPAN style=3D"FONT-WEIGHT: bold">From:</SPAN></B> =
Gene Ricci=20
[mailto:genr@swbell.net] <BR><B><SPAN=20
style=3D"FONT-WEIGHT: bold">Sent:</SPAN></B> Thursday, January 16, =
2003 4:27=20
PM<BR><B><SPAN style=3D"FONT-WEIGHT: bold">To:</SPAN></B> My =
Friends<BR><B><SPAN=20
style=3D"FONT-WEIGHT: bold">Subject:</SPAN></B> Can We Make Money =
Hedging ???? -=20
Maybe So.... Come to the next VectorVest Meeting - January 25th and=20
see</SPAN></FONT></P>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Times =
New Roman"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt"></SPAN></FONT> </P>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'">Yes, we're=20
going to discuss how to use VectorVest to 'hedge' at the next meeting, =
January=20
25th.<BR><BR>Please do some advance reading so that the session will =
be more=20
meaningful for you..... <BR><BR></SPAN></FONT><STRONG><B><U><FONT=20
face=3D"Comic Sans MS" color=3Dblue size=3D4><SPAN=20
style=3D"FONT-SIZE: 13.5pt; COLOR: blue; FONT-FAMILY: 'Comic Sans =
MS'">Hedge</SPAN></FONT></U></B></STRONG><FONT=20
face=3D"Comic Sans MS"><SPAN style=3D"FONT-FAMILY: 'Comic Sans =
MS'"><BR><BR>Making=20
an investment to reduce the risk of adverse price movements in an =
asset.=20
Normally, a hedge consists of a protecting position in a related =
security.=20
<BR><BR>If you owned a stock, then short selling an equal amount would =
be a=20
hedge. <BR><BR>This strategy is used when you are unsure what the =
market will=20
do. A perfect hedge reduces your risk to nothing (except for the cost =
of the=20
hedge). <BR><BR></SPAN></FONT><STRONG><B><U><FONT face=3D"Comic Sans =
MS"=20
color=3Dblue size=3D4><SPAN=20
style=3D"FONT-SIZE: 13.5pt; COLOR: blue; FONT-FAMILY: 'Comic Sans =
MS'">Hedge=20
Fund</SPAN></FONT></U></B></STRONG><FONT face=3D"Comic Sans MS"><SPAN=20
style=3D"FONT-FAMILY: 'Comic Sans MS'"> </SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><BR>An=20
aggressively managed portfolio taking positions on safe and =
speculative=20
opportunities. Most hedge funds are limited to a maximum of 100 =
investors. For=20
the most part hedge funds are unregulated because it is assumed the =
people=20
investing in these are very sophisticated and wealthy. <BR><BR>Don't =
be fooled=20
by the name, true hedging refers to reducing risk, but many hedge =
funds use=20
options, short selling and any other strategy to increase leverage and =
get a=20
maximum rate of return.<BR><BR>On the other hand, because many hedge =
funds use=20
futures, swaps, and arbitrage strategies you could argue that they =
diversify=20
away some of the investor risk from the stock market. =
</SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN=20
style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"></SPAN></FONT> </P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><STRONG><B><U><FONT=20
face=3D"Comic Sans MS" color=3Dblue size=3D4><SPAN=20
style=3D"FONT-SIZE: 13.5pt; COLOR: blue; FONT-FAMILY: 'Comic Sans =
MS'">Long/Short=20
Equity </SPAN></FONT></U></B></STRONG></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><B><U><FONT =
face=3D"Comic Sans MS"=20
color=3Dblue size=3D4><SPAN=20
style=3D"FONT-WEIGHT: bold; FONT-SIZE: 13.5pt; COLOR: blue; =
FONT-FAMILY: 'Comic Sans MS'"><BR></SPAN></FONT></U></B><FONT=20
face=3D"Comic Sans MS"><SPAN style=3D"FONT-FAMILY: 'Comic Sans MS'">A =
hedge fund=20
strategy that involves buying certain stocks long and selling others =
short.=20
There usually isn't a restriction on the country that the stocks trade =
in=20
either. <BR><BR>This type of hedge fund basically has free reign to =
buy or=20
sell what it likes. A long/short equity hedge fund is usually =
considered to be=20
higher risk. <BR><BR></SPAN></FONT><STRONG><B><U><FONT face=3D"Comic =
Sans MS"=20
color=3Dblue size=3D4><SPAN=20
style=3D"FONT-SIZE: 13.5pt; COLOR: blue; FONT-FAMILY: 'Comic Sans =
MS'">Equity=20
Market Neutral</SPAN></FONT></U></B></STRONG></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><BR>A hedge=20
fund strategy that seeks to exploit differences in stock prices by =
being long=20
and short in stocks within the same sector, industry, market =
capitalization,=20
country, etc. This strategy creates a hedge against market factors.=20
<BR><BR>It's the ultimate strategy for stock pickers because stock =
picking is=20
all that counts. For example, a hedge fund manager will go long in the =
10=20
biotech stocks that should outperform and short the 10 biotech stocks =
that=20
will underperform. Therefore what the actual market does won't matter =
(much)=20
because the gain/loss is offset by the other. If the sector moves in =
one=20
direction or the other, the gain on the long stock is offset by a loss =
on the=20
short. <BR><BR></SPAN></FONT><STRONG><B><U><FONT face=3D"Comic Sans =
MS"=20
color=3Dblue size=3D4><SPAN=20
style=3D"FONT-SIZE: 13.5pt; COLOR: blue; FONT-FAMILY: 'Comic Sans =
MS'">Market-Neutral=20
Equity Style Investment =
(example)</SPAN></FONT></U></B></STRONG></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><BR>The=20
main objective of market-neutral style of investment is to minimize =
market and=20
sector risk by buying stocks, which are expected to outperform the =
market, and=20
selling stocks short, which are expected to under perform the market. =
This=20
style offers the chance to make positive investment returns in a down =
market=20
as well as in up market. Theoretically, when long and short positions =
are=20
equally weighted and securities are paired for each sector then the=20
market-neutral style should render the portfolio insensitive to market =
risk.=20
Pairing of stocks is done to match long and short position for each =
sector=20
separately to cancel out risk associated with each position. Goal of=20
market-neutral investment style is to keep market exposure as little =
as=20
possible. Market exposure of a portfolio can be measured by the =
following=20
formula:</SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><BR>Market=20
exposure =3D <U>Long exposure =96 Short =
exposure</U><BR> =20
=
=20
=
=20
=
=20
Capital<BR><BR><BR>In practice there are always some uncovered risks, =
mainly=20
stock selection risk, trade execution risk and market risk of unhedged =
positions. In addition, hedge positions may not completely =
eliminate=20
market or sector risk. Therefore, active management is required to =
adjust=20
positions regularly and keep portfolio in line with acceptable market=20
exposure. Our attempt will not be to eliminate market risk but to =
minimize it=20
by keeping low value of market exposure.</SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN=20
style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans MS'"><BR>Selection =
of stocks=20
will be based on anticipated price performance relative to the other =
stocks of=20
same sector that is selecting leaders and laggards. Portfolio will buy =
stocks=20
of leaders, which are anticipated to beat the market and sell short =
stocks of=20
laggards, which are expected to lag behind. </SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><BR>To=20
effectively implement investment style, the main focus will be on mid =
and=20
large-cap stocks of large float and high trading volume. Up to 10 =
percent of=20
the portfolio may consider opportunities in small-cap stocks.=20
</SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'">When a=20
sector is in up trend, portfolio holdings will be bias towards long =
positions.=20
Consequently, in the downtrend, portfolio holdings will be bias =
towards short=20
positions. Timing of initiating long and short position may vary based =
on=20
sector trend line. Therefore, at times there may not be any hedge for =
a=20
particular position in portfolio. </SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'">Portfolio=20
may sell covered options on any long or short position when total =
annualized=20
return (option premium plus profit in stock, if Called or Put) results =
in at=20
least 30 percent or better. <BR>All short positions in stocks, if not =
hedged,=20
will carry a STOP Loss GTC order at all times. Initial STOP Loss order =
will be=20
placed between 5 to 15 percent loss level based on stock volatility =
and=20
technical indicators. <BR><BR>Links to other articles on=20
hedging:</SPAN></FONT></P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN=20
style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"></SPAN></FONT> </P></DIV>
<DIV>
<P class=3DMsoNormal style=3D"MARGIN-LEFT: 0.5in"><FONT face=3D"Comic =
Sans MS"=20
size=3D3><SPAN style=3D"FONT-SIZE: 12pt; FONT-FAMILY: 'Comic Sans =
MS'"><A=20
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