Interesting video Chipper. Finally some thoughts from people not listening to Fed narrative.
Steve
Maybe ‘lower for longer’ is the new narrative:
http://www.cnbc.com/2016/08/16/why-investors-can-stop-freaking-out-over-the-fed-in-three-words.html
Cool. J.P. Morgan’s shoeshine boy is pitching stocks again!
For the bold… TLT has settled down above the floor and looks ready to proceed upward again. The Fed hawks has not been effective with their “jawbone” tactics.
DISCLAIMER: I’m wrong 50% of the time.
Steve
Hi all,
I wanted to briefly revitalize this thread to see if you guys can help me reach some form of personal conclusion.
I am running a few live models. Among those:
- One is an SA using TLT as permanent hedge (Keating’s Ultra Defensive Portfolio)
- One is from me and has “a limited degree” of market timing: it stops buying when the market conditions are deemed unfavorable. The cash increases naturally as time passes (the model does keep selling positions over time but can’t buy new ones). I could invest that cash into something negatively correlated to equities to further reduce drawdowns.
I want to keep a day job not related to trading and do not have time to worry about whether the moment is ripe to move into / out of TLT or IEI or whatever. (i.e. don’t want to end up timing the composition of the hedge especially if this one is itself trying to time the market)
In other words, I am after a low maintenance hedge for the next few (10?) years that is negatively correlated with equities so that if there is an equity crash, there is degree of dampening provided.
I am not after max performance, just convenience, negative correlation with equities and better than cash
-
After reading all the comments of the thread, should I just do → hedge = {1/3rd IEI + 1/3rd IEF + 1/3rd TLT} ?
I don’t really want to add international bonds e.g. BNDX (introduces more unknown) to the mix -
Not really sure about GLD as Gold is typically negatively correlated with equities but has also unrelated swings → So maybe {30% TLT + 30% IEF + 30% IEI + 10% GLD} ?
Note that it is difficult to split into several ETFs or replace the hedge ETF provided by an SA model or by the hedge module of a port, but possible via transactions / manual buy/sell to initiate or close the position(s).
Thanks in advance,
Jerome
How about TIPS instead of TLT?
I like UST (2X IEF). Has similar volatility to TLT, but should have less duration risk in a rising rate environment. Other option is leveraging the 5 or 10 yr. treasury bond through futures. Moderately leveraging shorter duration treasuries seems to be a relatively “good” and responsible hedge for equities, from the research I have done.
This is exactly the issue right now. I think you’re going to have give up on one of the three.
If you can give up convenience, you’d be looking at shorting or inverse ETFs or options strategies.
If you can give up negative correlation, then you’re looking at weakly correlated asset classes like gold, possibly real estate, bonds.
If you can give up “better than cash”, then it’s cash or cash equivalent.
Thank you all.
@David: w/o doing the maths, but just eyeballing plotting TIPS against the SP500 over the last 10 to 15 years → does not display a great negative correlation. Was there any specific reason you had in mind e.g. the inflation protection so addresses “better than cash”?
@Charles: do I understand correctly what you mean i.e. using UST or futures allows using less money for the hedge therefore keeping more available to have larger long positions? Overall one ends up with a slightly leveraged portfolio (which should be OK if the investment strategy is a sound one)
Any other thoughts?
yes, TIPS for inflation protection (as compared to just cash at ultra low rates).
the other idea is to ladder bank CDs, if you have something like that in the UK.
Correct. Essentially, I have 65% sotcks and 35% UST which is similar to a 50/50 stock/intermediate treasury portfolio leveraged slightly at 130% or so.
I think TLT is the best hedge possible – against satisfying performance. 
I suppose everybody knows what a super-bear I’ve been on TLT, and I’m seeing nothing in the world to suggest I should reconsider.
And be careful about correlation; the statistic is useless unless you can convincingly explain, in words, not numbers, why the number you calculated from the past will continue to apply in the future (correlations involving things like TLT are especially likely to prove troublesome).
My opinion on hedges is that there are two ways to go. You can aim for moderation (IEI could be useful if TIPS are too tame, but that latter is good too) or balls to the wall . . . go for an inverse ETF, you don;t even have to take a leveraged inverse, standard will do. It sall depends on how comfortable you feel with your timing protocol.
Actually, this is me, lovable Marc Gerstein, from another account I use for some internal projects.
Marc - you have been right on so far. There seems to be a financial paradigm shift going on but we are still in the first inning of a very long ball game. We had economic numbers that were interpreted as very good occurring (cooincidentally) right before the election. In December there will be the Italian referendum http://www.economist.com/blogs/economist-explains/2016/09/economist-explains-18, depending on who one talks to is either relatively harmless or is a precursor to the third largest country leaving the EU. There is the Italian banking crisis which again is either nothing or a BIG problem, not sure who to believe on that issue. There is Brexit which still has to play out. Then there is the deflationary state of the EU. I am really curious to see where TBonds end up once the (US political) relief rally is over and reality sets in.
Steve
Thank you Marc for the heads up in getting out of TLT, did sell my TLTs for 138 08/09/16 figuring that it might not be a good hedge for stocks anymore…especially with leverage. So I sold and only been slightly leveraged in stocks (Factor 1.1). Once again Thank you!
Andreas
Dammit Steve, you messed me up. My post was in response to a private email somebody send calling my attention to the discussion and asking if I could chime in. After I posted, I set the over/under at an hour and I took the under on when you’d react. I missed. You were 29 minutes too late. It’s a good thing I didn’t bet real money.
Tough times . . . I’ve been doing just as badly at fantasy football.
I was too busy counting my day’s profits to notice your post, with TLT being up and all ;-(
Steve
And how about some fantasy football tips?
I don’t gamble.
How are the custom benchmarks coming?
Well, it looks like Black Swans are still out there.
I would consider the Trump election to be one.
His policies have created an expectation of higher inflation and hence higher rates.
It all could change after Congress looks in detail at his plans and then votes. Or the Fed could ‘rebel’.
But in the meantime, he has created a wild ride for bonds.
I guess we need to start hedging against hedges…