130/30 strategy w/ hedge

Hi all,

I was wondering if there is a way of implementing a 130-30 strategy with hedge: in ‘normal market conditions’ go 130% long on some securities and 30% short on a stock ETF. At the same time, when the hedge conditions are met (e.g. SMA(50)<SMA(200)), I would like to cover the short position and sell the long positions and go only 100% long on a bond ETF

Would anyone know how to implement this? The hedge is simple to implement through the HEDGE tab, but what about the 130% long and 30% short when hedge is not active?

Many thanks!
M

The way that I would approach this is with a few portfolios. I would make three portfolios:

  1. A 130% long portfolio that under some circumstances will go to cash;
  2. A 30% short portfolio that under some circumstances will go to cash;
  3. A 100% long bond portfolio that under some circumstances will go cash.

The trick is that the circumstances for the first two portfolios are going to be the inverse of the last portfolio, so that if 1 and 2 are invested then 3 is in cash and vice versa.

You can throw all three into a book, but I think that the results will be imperfect because it’s going to retain the cash positions. It is better to download the three weekly (or whatnot) returns into Excel and then just calculate the numbers that exist for any given week. That is, ignore the zero returns in any given week because that’s just cash. (P123 assumes a zero return for cash.) Instead, get an average of 1 & 2 or the return for 3, depending on where the numbers are.

Thanks Paul! with regards to these two portfolios, how would you make them buy/short only 1 specific ETF? and to have 0 holdings when the circumstances are not met?

To limit it to one stock/ETF is easy. Just use the Ticker function in a buy rule:

Ticker("SPY,XLV")

I know you only want one, but that illustrates putting multiple in there, which is to say a comma-delineated string. (Omit the comma for one.)

Getting into cash is basically making the buy and sell rules the inverse of each other.

So for example, if I had a sell rule of:

SMA(50)>SMA(200)

Then I would want a buy rule of:

SMA(50)<=SMA(200)

Note that there’s an implied AND between buy rules, so you don’t need to worry about putting all of that stuff into a single buy rule.

Also note that you can get much fancier, with specific entry and exit rules, just like in the hedging module. And that if you’re going to put your returns together in Excel, you don’t need to worry about the actual allocations of 130%, 30% and 100%. Just use Excel to get your proportions correct later.

Thank you Paul

How would you create the short SPY portfolio? I have tried, but I get an error message that the simulation did not buy any stocks in the first 260 day and could not proceed with the simulation

I would move the starting date later until it picks something up. The return earlier than that will be identical – zero percent. You can note that in the Excel combination. Just be sure to move that column down to the start date as well. :slight_smile:

Thanks,
wouldn’t there be a way of incorporating all three portfolios (1 stock + 2 ETF) within the same model? it’s just to keep track more easily of total portfolio metrics and total leverage

The problem is the number of holdings per situation. To drop a multi-position portfolio to hold a single portfolio AND have a hedge in the long condition is not something that the portfolio can handle easily. My first gut instinct was a book combination, but your varying weightings are going to make that unworkable too.

I have created two portfolios:

  1. long stocks + hedge with short SPY using the hedge tab and assigning the same entry/exit rules as the buy/sell rules
  2. long Bond ETF that has the opposite buy/sell conditions of the first portfolio

Would you see any disadvantages in using these two portfolios and the combining them on excel? I guess the book feature cannot be used as one portfolio would be held as cash

I think it’s easier to create three portfolios, but if you can make it work with two, great! :slight_smile:

but if I create a short-only portfolio I would get times where the leverage exceeds 10x - so how could I go around that?

I would ignore the leverage in the underlying portfolios. That is, just run a 100% long portfolio and then multiply it by 1.3x in the spreadsheet (for example).

This is what the P123 book would do anyway. The long portfolio ignores the cash generated by the short portfolio and the short portfolio ignores the equity in the long portfolio. I’ve been told by practitioners that this is actually a pretty conservative assumption, given that most people are going long/short to mitigate risk rather than juice returns.

Thanks
the problem of excessive leverage is with the short only portfolio, not the long one