With the New Year approaching, maybe it’s time to consider a new approach to investing. Unlike most forms of portfolio construction, Portfolio Armor’s hedged portfolio method eschews diversification. It looks radical at first glance: instead of allocating your investor’s assets among dozens of individual securities, you put their money in up to 8 names, some of which may even belong to the same sector.
In a nutshell, you buy and hedge a handful of securities that have high potential returns net of their hedging costs.
Easier Said Than Done
The first step here is to find alpha, which is difficult enough, without other conditions. But with this method, you don’t just need to find alpha, but to find it among securities that aren’t too expensive to hedge. That’s a tall order. It’s taken years to develop a system to do that, but I think I have built a better mousetrap.
Let me prove it to you.
Delivering Alpha
For the hedged portfolio method to work, you need to be able to deliver alpha, because hedging is going to be a drag on performance in most cases. In my article introducing the hedged portfolio method I included data from backtests from 2003 to 2014 showing the alpha my security selection method delivers. I included that data, as well as interactive versions of the hedged portfolio backtests on this page of the Portfolio Armor site, where you can see exactly what the underlying security and option positions were at each point in time. But I know backtests are going to convince you, so here’s something else that might.
Starting on June 8th, I’ve been presenting Portfolio Armor’s top ten names each week to subscribers of this service, along with selected hedged portfolios. As each portfolio lasts 6 months (positions are held for 6 months or until just before their hedges expire, whichever comes first), I’ve been presenting results each week since early December. These aren’t backtests, but positions and portfolios posted and then tracked in real time over the next 6 months. Here’s the performance of the top names from the first three weekly cohorts to complete:
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