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Strategies & Market Trends : A.I.M Users Group Bulletin Board

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To: LemonHead who wrote (15459)	4/2/2001 10:03:38 AM
From: Todd Reichardt	Read Replies (1) of 18928

Hi Keith, Some thoughts on shorting using AIM. One easy way to short using AIM is by AIMing a bear fund, such as a Rydex or ProFunds S&P500 fund that does the inverse of the S&P500. Since the fund does the inverse (i.e. when the S&P500 goes down the fund goes up) AIM should handle it nicely. If you wanted to short a stock using AIM, you could do a relatively simple calculation that mimics what the bear funds do. Essentially you'd establish a "short stock XYZ" fund. To get the "short stock XYZ" fund prices take your starting price of stock XYZ as the starting price of the fund, then for the next day's price of the fund take the first day's fund price and multiply it by (1- (percentage daily gain/loss of stock XYZ)/100). The resulting prices could be fed directly to AIM just as the bear fund prices can be. Its a relatively simple calculation that would only take minutes to do, which doesn't require daily action (i.e. you could do it at whatever frequency you use to make AIM buy/sell decisions). So that's one possible HOW, but I think there's an important WHY to consider as well. If you have a trading system, theoretically speaking you can improve performance AND reduce volatility if you can add a system that is negatively correlated with the first system. Take for instance if you are trading stock XYZ using AIM (call this system 1). If you can find another stock or index when traded using AIM (or any other method) that is negatively correlated with XYZ (call this system 2), then trading it can improve your performance and give you less ups and downs in total portfolio worth than if you traded system 1 alone. The interesting part is that is it can do this even if system 2 when traded by itself is a losing proposition. (Oh I just know I'm going to get beat up over that statement, but its true). The easiest way to get a negative correlation is by shorting. Hence, shorting provides one the opportunity to both increase returns and reduce volatility in one's portfolio worth, that's why I think its at least worth looking at. Todd

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