You shouldn't hedge because you are saying a stock will go up or down independent of the market. That's the view you are expressing. Or am I reading this wrong?
If you're punting on directional signals produced from a single stock model, where every selection is made in isolation, then you profit or blow up by the efficacy of that directional selection model. Assuming your signals are better than random, but fail occasionally, then choosing more than 1 stock is a good idea to diversify away that risk. An occasional loser should be bailed out by the vast majority winners. This is the whole idea of a directional model, no? To pick a direction that's usually correct? It all hinges on your signals being better than random.
yes my signals are better than random and proven to be so over time, so should i hedge or not? My equity swings can be huge though, thats why i raise the question of a hedge, would it not smooth?
not really, i can win big if im too long but also lose big if im too long. i can still win if im hedged but reduce big losing days if im hedged somewhat.
When the market rallies do your shorts lose money? When the market sells off do your longs lose money? Do you find yourself net long when the market is rallying? Do you find youself net short when the market is selling off?
-1*Sum(Beta*quantity*price)/priceSPY Please don't take offense to this question, but how do you build a presumably sophisticated long short system and not understand beta?