Tag: Covenant Capital

  • Hedging an equity portfolio: Volatility

    | | Strategy

    We opined in our last article that “Traditional Hedges Suck” that most traditional hedges had significant weaknesses and did not have many characteristics of a great hedge.  Volatility (long positions in VIX futures), while not perfect, has a number of these favorable characteristics for hedging an equity portfolio. The characteristics of a great equity hedge are three-fold: Makes more money in down markets that it loses in up markets; therefore, the hedge improves the risk adjusted returns of the portfolio. If the risk adjusted return is improved, the investor can either have less risk on the same investment size OR … Read more Hedging an equity portfolio: Volatility
  • A Better SPY?

    | | Investment Strategies

    Index investing is all the rage now with over a trillion dollars invested in the SPY and VOO ETFs alone.  The expectation is that low fees coupled with broad market exposure is better for your portfolio than an actively managed strategy with higher fees. One could argue that as the components of the indices attract more of the capital flow that these names really do drive the market and even a “diversified portfolio” often correlates highly to a simple index. I believe strongly that everyone should have some equity exposure but is there a better way to do it? Futures … Read more A Better SPY?
  • Why Traditional Hedges Suck!

    | | Strategy

    An article by Scot Billington, Covenant Capital Management Unfortunately, most traditional hedges suck. Buy and hold investing has been wildly successful since 1982; however, its adherents have had to endure two 50% drawdowns; a 25% down day; and a 14-year period of zero return.  Long term wealth is significantly impacted by drawdowns of more than 25%, because the necessary recovery rally follows an exponential curve. Let’s take a look at what’s needed for recovery:  A 30% decline requires a 43% rally to get back to even.  A 40% decline requires 67%; down 50% requires +100; and down 60% requires a … Read more Why Traditional Hedges Suck!
  • Separating Skill from Luck in Investment Performance

    | | Commodity Trading Advisor, Managed Futures

    Luckily (or should we say skillfully), there is a scientific way to approach the problem. We can consider a game of chance with some known degree of ‘inherent skill’. For instance imagine a trader who has a 50% chance of winning each trade he takes. Suppose the trader makes twice as much on his winning trades than he loses on his losing trades. This is equivalent to being paid 2 to 1 on a fair coin flip. The long run expected outcome of each trade is $0.501. This $0.50 expectancy is the ‘inherent skill’ of the trader. But an outside observer does not have this knowledge. The outside observer only has the trader’s track record and must use it to somehow decipher the trader’s abilities. So how is this best accomplished? … Read more Separating Skill from Luck in Investment Performance
  • High vs. low volatility strategies: A different view of risk

    | | Strategy, Volatility

    When investors think of risk, they usually associate it with volatility. This probably stems from Nobel Prize winning economist Harry Markowitz’s use of volatility in the 1950s and fellow Nobel Prize winner William Sharpe’s use of volatility in creating his self-named method of risk adjusting returns. The lower the volatility of a given investment theoretically indicates that investment carries less risk. Risk, however, could be viewed from a different angle. The impact of a high volatility investment on a portfolio can be mitigated by the allocation size given to that product. By normalizing for volatility, theoretically, high and low volatility investments can have equal impact on a portfolio’s total return. This leads us to a different way to view risk. Risk is the difference between the anticipated worst loss and the realized worst loss. … Read more High vs. low volatility strategies: A different view of risk