PORTFOLIO UPDATE: HEDGING AIN’T EASY
During the trading day Friday, I tweeted the following:
To date, the strategy I am using to hedge the portfolios via TZA during perceived turbulent periods has been the biggest losing trade(s) of 2013. In fact, it has cost the portfolios some 600 basis points of performance. If I was up 35% for the year thus far, I wouldn't sweat 6 percentage points of performance. But when I am up close to 10% for the year, 6 percentage points becomes quite a lot.
In fact, looking back at my results, I am hard pressed to find another asset that has cost the portfolios 600 basis points of performance. It is a testament to how well I control position size in losing investments. I rarely, if ever, average down, instead choosing to lighten the load if a stock doesn't perform as I suspect it should. This causes losing momentum to be dulled down in the individual investments that I make.
The question I must ask myself at this moment is whether utilizing TZA in the portfolios is actually increasing the risk profile given my already stringent methodology of controlling position risk? The TZA hedge is a play against market risk when the portfolios I manage may not play into general market risk at all due to the fact that the positions run separate from the general market. These aren't stocks like AMZN and CSCO that run with the Nasdaq and S&P. They are companies with market caps below $300 million typically that are thinly traded, having a mind of their own.
I'm simply thinking out loud here in an attempt to refine my methodology further. The work never stops.
Thanks for listening.
