Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : CFZ E-Wiggle Workspace -- Ignore unavailable to you. Want to Upgrade?

To: robert b furman who wrote (23267)	4/3/2016 12:44:38 PM
From: skinowski	Read Replies (1) \| Respond to of 41411

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....