Mr. Market will always find a way to prove us wrong and make us pay more tuition.... For me, this time, it was a "smart beta" ETF called ALFA. It was supposed to be the best thing since sliced bread - it was cloning the best performing hedge funds, and was actually doing very well. When SPX goes below its 200 dma, ALFA is designed to hedge its market exposure, 100%. So, it's meant to be "safe".
During this decline, I felt that it was acting strange - as if it's not hedged at all. One reason was that their aggressive hedge fund holdings were taking a bigger beating than the SP. Another reason, I suspect, is because of a faulty design - unless their hedge is dynamic, and changes all the time to fit the holdings, the following will happen. Imagine that the value of their positions would fall by 50%. In this situation, they are hedged no longer 100% - BUT 200%!! In other words, for every $1 in holdings, they would be short $2 in short futures. This means if the market keeps crashing, they will hold their value, but if the market rallies, they'll be swimming with a bag of rocks tied to their neck. It may take them a long, long time to make it back above their 200 dma, where they would shed the hedge.
Anyway, I bailed out of 60% of my position early on, but still stuck with 40% - and feeling (deservedly) stupid.... |
