HF
- Start with asset allocation. I recommend a LDI strategy using either CPPI or dynamic asset allocation. Determine your switching model for growth or defensive cycles (scorecards work really well- global pmi, global equity benchmarks, policy outlooks, etc.).
- Within your asset allocation (say you switch between 80% growth assets and 20% defensive assets to 20% growth assets and 80% defensives and vice versa) pick which assets you want to manage yourself and which you want to hire a manager for (e.g. maybe emerging market bonds can be offloaded to a mutual fund or ETF).
- Within assets you want to hold, you want to track regional performance, sector performance, and factor performance. You can then drill down to top performing regions/sectors/factors and bottom regions/sectors/factors for your long or short ideas.
- Read industry research to determine which industries are positioned best-- within those industries compare companies to find your factor preference, and then conduct due diligence to determine if there's a real opportunity there (expected return should be double digit -- 10-25% at min).
- Use quantitative and technical data to help determine timing -- there's something called "short-term reversal factor", read about it and manage your trading in such a way that you avoid it (setting RSI to 20 days and buying slower when it is high and faster when it is low is a good way to start). Use price alerts to exit on the downside, but your main risk management tool should be a reduction in overall portfolio beta or covariance. ON the upside, do not exit a trade unless your view of the company has changed. I don't care how high it has rallied-- keep it unless the earnings outlook has changed. And when the earnings outlook changes, DUMP IT.
- If you go long/short, go long/short across top and bottom performing sectors/industries/factors/stocks; going long/short reduces your equity beta which will enable you to take on more leverage. Limit your leverage to 1.5x to 3x per trade, with max of 2x of your account.
- You can enhance your portfolio by using calls and puts as both insurance and upside capture. E.g. if your stock selection portfolio has a beta of 0 (market neutral), spend 1-3% of your portfolio on long-dated S&P calls. You can do the same with puts if you are taking on direct beta (long only).
- Have fun.
Authored by: Certified Hedge Fund Professional - Portfolio ManagerCertified Hedge Fund Pro
