Any long/short players here?

Discussion in 'Stocks' started by Cutten, Oct 23, 2007.

  1. Cutten


    I was wondering how many ET stock players use the classic long/short hedge fund approach. I've typically just had a long stock portfolio (half gogo stocks and half value plays), and varied the size from 0-100% of assets depending on my overall view on the stockmarket. But I was running some extensive backtests recently and found that I could reduce risk by far more than I would reduce return if I used a fully hedged long/short portfolio - just using short S&P to offset my stock portfolio.

    For example this year my stocks were up about 35% into the June/July, vs around 9% for the S&P, but during the July/August period (where I was mostly 100% in cash), the portfolio would have declined about 17.5% vs 11.73% for the S&P. If I'd just used a straight S&P hedge and no market timing, I've have had a 26% initial return and then a 5.75% drawdown. Then ofc a huge return off the August lows (though I would never have hedged much then since it was a pretty clear bottom).

    The figures look pretty good - make 75% of the return, and have 1/3 of the risk. And that is totally ignoring any market timing. Simply reducing hedges near market bottoms, and reducing longs near obvious tops, should add a pretty nice % per annum as well. For example, be 150% long the portfolio with 50% short S&P at lows or when very bullish; and at perceived tops either be 100% cash, or 100% long portfolio and 100% short S&P.

    The main thing though is it would allow capture of superior portfolio returns whilst mostly reducing the heinous drawdowns that a 100% long portfolio would face. And on rare occasions that there are obvious shorts (for example the real estate sector in 2007), you could even make money on both sides of the portfolio.

    Has anyone traded this sort of style for any length of time? I'd be interested in hearing any experiences.