Is a long Portfolio with very bad performance a good Short Option?

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1

Hello everyone,

First time posting here and new to Portfolio123.
I have had excellent returns over the last three years after turing quant using only European equities (I use a different site to screen for this portfolio).
In any case, I stumbled upon Portfolio123 and it seems like a great tool.

When testing some screens and running backtests, I ended up setting up a set of rules that yield a very bad performance (annualized):

-6.9% over a 10 year period
-3.1% over 5 year period
-15.6% over 3 year period
-4.3% over 2 year period

(slippage was 0.25% and no carry cost was assumed)

My question is, should I be shorting this portfolio? It is a 10 stock portfolio, but the results are comparable for 20.

Thank you in advance

2

Since slippage works against you, the negative performance may just be cost of turnover. Do the negative returns disappear when you set slippage to 0?

3

Hi,

I had not considered that slippage would work against me in this case.

Setting slippage to 0 would yield the following return:

-3.2%
-14.7%
-2.1%
-6%

So basically almost 1%

In all honesty, I am not looking to always have a short portfolio/hedge to my current portfolio, but I have generated a lot of alpha over the last 3 years, and since the markets are expensive, in times like these I would like to be able to hedge.

Thanks

4

As you may already know, shorting is harder when you are dealing with smaller stocks with low floats. It may be hard to find shares to borrow and may end up with higher slippage as compared to entering long. For me hedging using ES futures has worked well – it offers good liquidity to go in and out, as well as allows adjustments after market close to reduce gap risk.