Dale, kudos to you for establishing the short positions earlier on.
Lederman & Klein have a book titled "Hedge Funds," and in one section, they create an efficient frontier based on long/short mixes. Without a doubt, the value of blending a short position is made evident with the charts provided.
For example, it shows roughly a 1% sacrifice of expected annual return for about a 3% reduction in quarterly standard deviation as one establishes a 70% long/30% short mix on the S&P500.
For the Nasdaq, the results are even more significant. Based on the chart on page 108, it would almost appear as if you can reach a similar expected return for the portfolio (about 8.5%) by creating a 58% long/42% short mix as with a 100% long portfolio. The difference, however, is the reduction of risk from about 10.5% standard deviation to about 3%.
Of course, as with all statistics, the past doesn't necessarily translate well into the future, but the message is fairly clear.
Good luck.
Rainier
PS. Funny that you chose to short DRTN. Even here, it seems expensive, but the group as a whole has tended to stabilize. The big money to be made on a short is behind you IMO, and you'll probably have to fight for the rest from here on. |
