That’s a hard approach to wrap your head around. If it’s a only small position (ie 1-3% of assets in an inverse fund) you should want to lose $$ on it, since that probably means your total portfolio is doing quite well. But, it’s difficult to want to see anything you hold fall …
Some I’ve used over the years as short term hedges in small amounts: SPDN, DOG, TAIL, CCOR. GLTR (metals). None (except the precious metals fund) really did well. All offered some mitigation of downside volatility. Selling buying puts seems to be one method of hedging. I think that’s what Hussman uses in HSGFX. The fund has netted close to 0% since inception about 15 years ago. I’ve never set stop-loss orders, but I guess that’s another form of hedging. Of the bunch I’ve played around with, TAIL proved the worst, as it’s tied to the VIX which hasn’t behaved the way it was expected to on big down days. Also, TMSRX and BAMBX attempt to hedge market volatility. Look great on paper, but haven’t exactly shot the lights out!
There are of course many long-short, market neutral, hedged equity type funds that employ shorts hedging. So as a fund holder you can more / less shut your eyes to the portion of the fund getting hammered. Beware - Those types of funds are often high-fee.
Cash is a hedge, especially at today’s near 5% yield. Limited ability, however, to cushion really big downside. Also, I’ve thought of using a small position in long U.S. Treasuries as a hedge, but haven’t actually tried it. Would have been a nasty ride I’m afraid.
Comments
Question for you sir. In your opinion is shorting, long short more of a psychological approach to keep you invested? Very difficult to get right, timing and all, have to be right, hard to know when the central banks step in , psychology of market participants....hussman makes so much rational sense, makes money when market turns down but then gives it back and goes nowhere in an interesting way as you alluded to
My perspective after never winning long term by shorting is to never expose to the markets more than 6 to 9 months of salary, work compensation if the sp500 drew down by 50%. Ya very conservative but compounds the portfolio very well.
Another way to satisfy the shorting Jones might be to be in a fund like velix which does short somewhat and opportunistically or maybe fpacx which can have an eclectic approach and keep you invested through a down flush in the markets
Annual average return can fool a lot of folks....start go up 50% and then down 50%. Average over two years is 0% return but you're actually down 25%.. from where you started. Compounding your wealth is important and if shorting prevents the big flush or keeps you from being to aggressive might work...
Best regards
Baseball fan
Ergo, since I'm usually a lousy market timer, if I do get really worried, I'll either move into cash, lighten up a position, or write some covered calls...but usually stay in the game. FWIW saying, I do use option collars too -- I have one that I established when starting a large income position right now that's doing just fine (stock bought at $35, collared at 30 and 40).
As to your question, I’ve viewed the issue both as a possible long term tactic and, more importantly, as a near-term proposition.
Longer term is tough to justify. But if you are a good stock picker (I’m not) you could argue that your investments will do much better than the general market. Shorting the general market (in an unspecified amount) might allow you to take additional risk in the stocks you are more comfortable with. The shorts will provide a degree of protection in sharp sell offs while your stock choices will outperform the overall market most of the time.
ISTM that’s the philosophy behind most long-short funds. Maybe market neutral and hedged equity too - not sure. I’m pretty sure T. Rowe’s TMSRX has a small short position. And their globally diversified RPGAX used to include a 10% weighting in a Blackstone hedge fund that employed shorts. Don’t know if it does any more. Just to say the notion’s not as far-fetched as might sound.
Shorter term, I’m struck by the near unanimity of some pretty smart investors in the Barron’s Roundtable that (1) The S&P is greatly overvalued and (2) there are still many attractive stocks in many other areas. It would seem logical to short the S&P while adding to your undervalued equity areas? No.
I realize it’s not that simple. The old adage about ”Markets can remain irrational longer than most investors can remain solvent” applies.
I’m looking at JHQAX right now thru my subscription to the FT. It shows 97.6% long U.S. equity, 1.82% long non-U.S. equity. No shorts. Top 5 equities: Apple, Amazon, Microsoft, Nvidia, Alphabet. Those 5 comprise over 23% of portfolio. All 5 of those stocks, except Amazon, have gained over 30% the past 1 year. And Nvidia is up 200% over that time. So, how that fund hedges is a mystery looking at the chart. I imagine it
sellsbuys puts on its holdings. Pretty common practice. Giroux was big into that several years ago. But don’t know about today.Re Nvidia, I noticed the other day it was one of the top 2 or 3 holdings in PRPFX. The fund does invest in “aggressive growth stocks.” So I guess it struck “gold” with that one.
Don’t know about Schwab’s site. But Fido’s analytical tool will show short positions as a % of any asset you own and subtract that sum to display your “net” long equity position. Good tool. Shows me 50% equity long, 8% short for a net 42% equities, Sounds about right considering all my holdings plus a 1.5% short position (SPDN) I initiated directly yesterday. Interestingly, it also shows a small (4%) short position in short term bonds. Possibly one of my alternatives has figured out how to do that.
”The protective put strategy simply involves the purchase of a long put option that may potentially gain in value if the stock price declines.”
https://epsilonoptions.com/protective-put/
I’ve never considered the folks at TRP idiots. Some here have held stakes in TMSRX in the past (including myself). The numbers on FT show very heavy % in shorts. So heavy I don’t trust them. I’ll attempt to link their page, but doubt it will pull up without a subscription.
https://markets.ft.com/data/funds/tearsheet/summary?s=TMSRX
BTW - What @Mark said about small amounts not being enough to make a significant impact on overall performance is true. One reason I don’t mess any more with small spec stock positions. A lot of extra headache with little to show for the effort.
The "protective put" mentioned above is a good example and can be analogized to collision insurance. You pay for collision insurance (a stock put). Without insurance, if your car is totaled (stock price plummets), you're stuck with salvage value (severely depressed stock price). With insurance, you get back a fair percentage of the car value (stock purchase price).
One speaks of "hedging one's bets". Merriam-Webster defines this as doing "things that will prevent great loss or failure if future events do not happen as one plans or hopes." It gives the example: "They decided to hedge their bets by putting half their money in stocks and the other half in bonds."
That's hedging, or insurance. You're paying something (opportunity cost of greater stock earnings) to protect against greater losses (100% equity exposure in a market crash).
So one answer to the original question is: everyone hedges, though most probably don't think of asset allocation as hedging.
Unfortunately (IMHO), "hedging" has become synonymous with any tinkering with risk, whether to decrease it, to increase it, or to shift it from one security (or asset class) to another.
Worried about TMSRX, that has 29% in equity shorts (net 15% short position), and 47% in fixed income shorts (net 12% long), per M*? A mere trifle. PIMIX / PONAX, a fund lauded here, has129% in fixed income shorts (net 188% long), and has 222% in cash shorts (net 89% short) suggesting a lot of leverage. Figures from M*.
The trick is to know (a) why the manager is hedging (for protection or profit or both), and (b) how the heding is done (i.e. how is the risk profile being altered). ISTM knowing the first is possible (from manager statements, fund behavior) but knowing the second is difficult. Hence a natural aversion to "excessive" hedging.
Puts appear much safer than shorting as a hedge.
Re shorting - I can foresee a case where an experienced global or international asset manager might see overvaluation in one region and ”bargains galore” in another region or country (apologies to James Bond). In that case his fund might carry some shorts in equities / equity indexes of the overvalued region and than go overweight equities where he sees more value.
As they say in all the prospectuses, “There is no assurance this strategy will work.”
JPM discloses JHQAX hedging strategy in detail on their website. My recollection is the Puts & Calls are against indices, likely S&P 500. It is not a black box fund. You can read on their website and feel free to correct me. (JEPIX - not a subject of this thread writes calls primarily against its position if I recall correctly. The same team manages both.)
Need some definitions of “wise” here … Would that be throwing 100% into equities? Perhaps via an inexpensive index fund? Or maybe using an inexpensive a 60/40 balanced fund like DODBX would fit the definition. Or, just possibly, true wisdom would be to just hand it all over to T. Rowe’s wildly popular superstar (who, incidentally, has traded puts in the past) … Oh - I forgot - Not everyone can get in, though it doesn’t keep them from jumping through hoops in an effort to give Mr. G their money.
Yes. Stay away from timing. Agree.
But stay away from considering relative valuations? No. Asset valuations fluctuate over time. To some extent, herd mentality plays a part. None of us has a crystal ball in that regard either. But part of being an investor - professional or retail - is trying to assess relative valuations, be it in large-cap stocks, small-cap, EM or developed global markets.
There was, I think, a lot of “timing” going on in the retail sector in mid ‘22 - a mere 10 months ago. Many unloaded equities due to predictions of approaching recession. Here is an intriguing MFO thread from September, 2022. Pretty typical of the prevailing retail tenor of the day. Where was the buoyant optimism of today back than?
https://www.mutualfundobserver.com/discuss/discussion/comment/153670/#Comment_153670
- One comment: ”I think you have to be worried that it will take five years for stocks to recover.”
- Another: ”Gloomy now, just think how bad it would be if we were in a *recession*”
- Another: ”Ty for the heads up. Not sure what to do now - wait w cash /buy more CDs hoping crisis will pass.”
- And from the excerpted NYT passage: ”Mr. Tangen, of Norway’s sovereign wealth fund, said that he did not think there was an investment area anywhere in the world likely to make money in the near future. ‘That’s the really depressing thing,’ he said.”
The NYT article, which the distinguished @Old_Joe posted at the top of that thread, is dated Sept. 16, 2022. Below is a link to the closing averages for that day. Would you rather buy the S&P back than at 3873 or today at 4555? https://www.coastalwealthmanagement24.com/the-markets-as-of-market-close-friday-september-16-2022/
Despite the air of pessimism running through the thread, a number of posters did see a buying opportunity. @LewisBraham, for one, suggested it might possibly be a good time to buy equities - and made exquisitely good sense as usual. @Junkster mentioned that HY might be a good buy.
Deciding what to own / what to hedge (if anything) relates to assessing relative valuations. I claim no particular acumen in that regard. Just saying, timing aside (don’t do it), there is always the more critical question of relative valuations to consider.
Chart (https://schrts.co/mEAddMPX)
I have attempted to do my own shorting from time to time, most recently with SQQQ or buying puts. Have never been really successful. I have had much better luck sticking to the deepest volatility funds and equities I can find and trading them on their technical indicators.
Year to Date 1-Year Since Inception
BLNDX 4.88% 3.05% 12.68%
REMIX 4.82% 2.86% 12.42%
50% MSCI World Index & 50% BAML 3-Month Index 8.85% 11.38% 5.50%
50% MSCI World Index & 50% SG Trend Index 7.78% 9.00% 11.12%
Once all the dust had settled, my sense is that I would have done much better to go to cash other than try to buy an alternative fund to protect my portfolio. IOW, I did not make any money from my positions in REMIX. As someone else pointed out, one would need a sizable position established before the terrible downturn in stocks and bonds in order to have a positive effect. The position would have had to be big and it had to be early. That’s a tough order to fill. I have never tried shorting any asset, so I can’t report on that.
Thanks for making me aware of HEQT. I am one of those "nervous" investors that has been well served by JHQAX in the past.
While HEQT "has done quite well so far this year", JHQAX has achieved higher YTD and 1-year total returns but with higher volatility.
Unfortunately, HEQTX has been in existence for only 1.7 years, whereas JHQAX has been around for 9.6 years. Difficult to make a judgement about a fund over such a short life span.
I will add HEQTX to my watchlist to monitor its risk/reward performance over the next couple of years.
Again, thanks for the tip, Richard.
Fred
My conclusion is that the only thing that works, especially for retirees who have enough is to go to MM in high-risk markets and back to invest when markets are "normal. Sure, it's called timing. Timing doesn't have to be perfect, just good, just like investing isn't. All you got to do is come up with a system and try, if it does not work then stop.
Here is another point that many miss. Missing the worst days is better than missing the best days.
https://www.barrons.com/articles/timing-the-market-pays-off-buy-and-hold-51588186928
So here’s the full truth, according to data from Ned Davis Research. From 1979 to mid-April of 2020, the S&P 500 Total Return Index gained 11.23% per annum. Sure, if you missed the best 40 days, returns shrunk to 5.21%. How about if you missed the worst 40 days? Nobody ever talks about that, because you’d be accused of market timing. Guess what? Your returns would soar to 18.83% annually. And importantly, if you missed both the best and the worst 40 days, you actually beat the market at 12.39%.
FD: and more importantly, the portfolio risk-adjusted return is much better too.
Read the following
https://www.cambriainvestments.com/wp-content/uploads/2018/01/Where-the-Black-Swans-Hide-the-10-Best-Days-Myth.pdf
Conclusions:
1. The stock market historically has gone up about two-thirds of the time.
2. All of the stock market return occurs when the market is already uptrending.
3. The volatility is much higher when the market is declining.
4. Most of the best and worst days occur when the market is already declining because markets are much riskier than models assuming normal distributions predict.
5. The reason markets are more volatile when declining is because investors use a different part of their brain making money than when losing money.
Many corresponding "alt" funds are expensive to own and they often don't perform well over longer time periods.
Having said that, I've noticed JHQAX (several others mentioned it) a while ago.
This fund seems to offer appealing risk/reward characteristics and it's less expensive than many "alt" funds.
M* uses all the SEC filing information to present exposure by asset class. PIMCO mechanically sums market value figures, disregarding the effect of derivatives. Of course these figures don't match. One set informs investors about how the fund behaves (which is the theme running through this thead), the other is a pro forma summation.
The significance of this distinction can be seen easily using DSENX as a model. This fund uses nearly all its cash to purchase bonds (100% fixed income exposure), and then for next to nothing buys derivative exposure to the CAPE index (100% equity exposure). Cash exposure is thus -100%. The prospectus explains this and M* shows the fund to have approximately these exposures.
DSENX filings show that about 97% of the fund consists of fixed income, and 0% is equity. Those market value (MV) figures are accurate, just as the MV figures for PIMIX given in a post above are accurate. And they're all misleading.
No one thinks of DSENX as a bond fund. Rather it is presented (rightly) as a CAPE index fund with a bond kicker (100% added fixed income exposure). While PIMCO funds are more inscrutable, they similarly use derivatives to achieve behaviors that are belied by simple market value summaries.
In the last several years, PIMIX managers also used higher leverage (and the ER was much higher). It all boils down to the fact that PIMIX is more of a black box where I don't know what they do at any given time and it's less predictable than other bond funds.
This is why I used to own PIMIX for 7-8 years at a very high % and sold it years ago.