That's one big long position with A LOT of energy bought at new highs. Not saying it can't go higher but the high and recent energy prices are very well known to all market participants.
Also, where's the 'hedged' part as in 'My Hedged Fund'?
Fair questions Anley.
Am I "too heavy" on Energy? There are two answers to that, one based on raw data, the other based on the actual theory behind the "Trend Following Strategy." Here they are:
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The raw data - So your statement made me curious, because like you, I had "sensed" a significant investment in Energy ETF's. The data shows that I have $23K in ERX (leveraged Energy), $8K in FCG (Natural Gas), $8K in IYE (Energy), $8K in KOL (Coal), $8K in NLR (Nuclear) and $8K in XOP (Oil & Gas Exploration). The total is $62,172, out of a potential ~$305,000 for a 20% total investment in Energy ETF's. May be a tad high, but not to a level that worries me. (Anley, do you have a max investment in any sector? If so, what is it?)
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The better answer - I may not care. Trading using trend following techniques is after all about buying "buying high" and "selling low." While I would tend to avoid concentrated exposures to any one market / asset, if the trend is strong (as with Energy right now), I may not mind getting heavy on it. In a strongly trading market, I don't fight it, but
carefully ride it. I am of course keenly aware that the trend may turn against me at any time (on Energy and all other assets by the way), and I'm ready to sell as soon as that happens.
Where is the "Hedge" in "My Hedged Fund"? This, honestly, is a great question Anley and I will add this reply to my blog. Here are my thoughts on the topic:
Hedging as typically defined is a strategy which, if effectively implemented, should remain profitable and be protected from unanticipated market turns by having exposures on both the Long and Short sides of the market. By conducting what is often referred to as "pairs trade," the investor seeks profit by buying a Long position while reducing the overall market risk exposure by hedging (selling) against it.
Example - Someone following this strategy would, for example, buy Sanofi-Aventis because he feels the company has a bright future, but sell Novo-Nordisk (assuming he feels its future is not as bright) at the same time to hedge against market risk. If the market trends up in general, the Sanofi investment will go higher than Novo's (assuming the stock selection was accurate), and the Long gains will be greater than the Short losses; the investor wins. If the market trends down in general, the Sanofi investment will go down less than Novo's, and the Short gains will be greater than the Long losses; the investor wins.
Now, not all hedge funds look to be market or beta neutral; "Hedging" has other definitions, and no surprise here, one of those "other" definitions is the one I subscribe to. Some hedge funds strategies are dependent on pure market direction and are thus "directional bets." Strategies such as "global macro" (the one I use) are particularly directional, seeking to capture macro trends (in my opinion trend following at its best.)
What I do is try to identify as many ETF tradeable trends as I can (currency, commodities, Indices, and yes shorts) and structure a portfolio of multiple directional bets to capture them. Though
this investment is not classically hedged, the sum of the total instruments should diversify my risks such that the performance of the portfolio is not highly correlated (and therefore hedged) to the general markets.
The reader who's interested in a more in depth discussion of the topic is directed to "Do It Yourself Hedge Funds" (OK, so I did not come up with the title) by Wayne P. Weddington, who touches on these topics with some depth.