Is this a stupid way to "short" stocks

Discussion in 'Strategy Building' started by wabrew, Sep 14, 2005.

  1. wabrew


    I saw a post from Momento today about his meltdown.

    This post made me wonder if I am also on track to a meltdown.

    I have had bad experiences with shorting in the past and I am very risk adverse – so instead of shorting I use the Rydex inverse QQQQ fund to be able to participate in down markets... (RYVNX) I originally bought 25k of this fund.

    “Investment Policy: The Fund seeks to provide, on a daily basis, investment results that will match the performance of a specific benchmark. The Fund s current benchmark is 200 percent of the inverse ("opposite") of the Nasdaq 100 Index.” From their brochure

    Over the last two years I have used this fund as a hedge against my long positions. I have (had) a 100K account – 25 in this fund (which is like being short 50K of the QQQQ) and the rest in other (non QQQQ) stocks. I use no margin, normally do no day trading, and usually look for 3-5 day moves in volatile stocks. ( IBD breakouts, Hershey method etc.) I usually have 10 – 20 trades per month. I usually am long 4-5 stocks at any given time.

    When I feel bearish I stay mostly in cash and this lets me gain on this “synthetic short” of the QQQQ.

    So, always being “short” the QQQQ sort of forces me to be long stocks which I think will outperform the QQQQ in up markets. This is a must for this system to be successful!

    Sometimes, if I just do not like anything, I buy 50K QQQQ to offset the short – (this keeps me flat)

    Up until three months ago this worked beautifully for me. 8 out of 10 of my long trades were profitable. My account grew almost every month. (I shoot for about 2%/month and draw out profits.) This worked for about 2 years.

    I feel like I am on tilt now – 8 out of my last 10 trades have been losers. My 100K account is now 90. My account is now 22,500 RYVNX and about 67,000 cash.

    Here is my question – has the market changed thereby making this a stupid system? Should I just liquidate and do something else with the money – or, should I just stay at it. Is anyone else using QQQQ or something like RYVNX for hedging?
  2. Hamlet


    On the surface it sounds like a money mgmt issue. If your target is 2%/mo why did you allow yourself to lose what sounds like a big multiple of that in 3 months? How did the short hedge perform relative to the longs? Did your recent losers have different characteristics than the longs you traded over the last 2 years? Did you force yourself to take longs when you didn't really like any that much, just to offset the hedge?
  3. wabrew


    You are right - it was a mm problem -- also, last two months the short lost while I was also losing on my long selections
  4. Hamlet


    I think it could be a good system and would stick with it using better mm and make sure longs have decent beta to the hedge and also diversified enough (not too correlated to each other).