As mentioned, since the downgrade of US’s AAA rating to AA+, my portfolio had taken a hit, partly because I had at least 60% in equities, some of Asia and International Stocks. The rest were in Fix-Income. Then I had a bet, to diversify my Funds, lowering the % of Equities and increasing my Fix-income %. You can view that graph of portfolio breakdown in my previous post.

By buying a Municipal Bond Fund, a mutual fund managed by an Investment Firm, you are buying into a mixture of Munis issued by National states in the US. Nevermind the details, the fund trades like a stock on the NYSE. The payout of these mutual funds are Tax-exempt, so you get the full 100%, instead of getting NRA taxed on 30%.

Here, I’ll post a 4 different charts of different asset classes, sectors on equities, country macro and lastly Municipal Bond funds, compared to S&P500 Index. You can easily see how money flows to each asset classes, and investors?flocking to these safe havens. Also as a true portfolio diversification, it should contain a mixture of different Asset classes too.

Remember if you can’t beat the S&P500 index, or if the type of investments you’ve gotten into correlates to the Index, then it makes no sense to invest at all. It’s only market risk and timing you are dealing with, and diversifying nothing.

1. Corporate Bond Funds – very similar to S&P500

–

2. Equities with Multi-Sector Funds – correlated to S&P500

–

3. Country Macro Index Funds - Worst, but its performance shouldn’t be measured against it since its a Global index

–

4. Municipal Bond Funds – you decide

These charts are courtesy of Goggle Finance.

To sum up, not only is diversification within multiple stocks is important, but also across different asset classes, including high yield and safe havens. A conservative portfolio should be used for long term holdings, in times Debt and Euro Crisis.

Initially I started worked with producing Pure Random data, with volatility parameters to simulate the Brownian motion of stock prices. Comparing SGX and NYSE, its a different way of coding it, anyway I was trading the US markets.

http://en.wikipedia.org/wiki/Monte_Carlo_method

So then came along Algorithms, the things that say if A is X and B is Y, then it A/B = 0.02 and bla bla yada. That’s how I came up with my first “Algorithm”, designed to detect market movements and pressure, be it up, down or sideways. By the wy, this was history because it was used as a platform to test out my Monte Carlo (Hail the great 1st Algo!!!)

Great learning though, things like Fat Tails, Probability Distribution Function, Law of Large numbers, Curve fitting, Real life trading, Cut loss simulations and certain Black Swan Scenarios were built in to “Stress” my Algorithm. Then I came up with more and more Algos, Algos that are supposed to detect and manage different stuff, like Breakouts, Opening / Closing, Spreads, Trends, Reversal, and etc…

http://en.wikipedia.org/wiki/Algorithmic_trading

They required more CPU x core speed, and tons of Excel spreads running on my 3 computers, about 30+ of them dealing with different paramters, volatility, different pricing models, etc etc… That took me 2 months.

Computers meets Wall Street

Then it was easy; With random data running all over my Excel, I soon replace them to take in Data from Finance Google. Nevermind HFT running level 2 quotes, trying to Front run Bids/ and Asks at 900 microseconds, (the link from SG to NY is 300 ms on average all major ISP, unless I colo my system to US :> )

http://en.wikipedia.org/wiki/High-frequency_trading

Pulling data from Google Finance was easy. I started coding in Human reactions, or things you would do or behave, automatically. Eventually, I’ll complete the task: Interactive Brokers TWS platform, with my excels connected to its TwsDDE.xls. See my next blog post. It’s magic .

Automation vs Manual

As a Portfolio of strategies, I now allocate my capital of 40% to this Algorithm trading, and 60% to all the other strategies including Asset Allocation based long term trading and other derivatives strats.

For me, I am about to dump my portfolio aside, make it a low yield cash cow, and instead move on to other Alpha generating strategies.

The traditional fundamentals and portfolio management is just plain slow and boring, and hmm… its time i bring up my VB6 / Java and the days of day trading algos… all into Automated Day trading.

Keep it short, some points to note, things learned, actions taken:

- Vix Shot above 25.

In my style of investing, anytime when VIX goes above 25, I have to cut the volatile stocks, keep some cash, and neutralize some beta of my portfolio by being short some stuff or the S&P500 Index.

- Credit downgrade of US Treasuries.

Before the actual announcement, somewhere near end of July, there were already news that mention some US Bonds might default. And it was getting serious because politics were involved. I started to readjust All Funds that contain that bit of US treasuries, especially those from PIMCO HIGH INCOME Fund and some others. Losses taken here

- Big volatile day movement of 5%, up or down.

I had been playing around with Options Trading and strategies, and I would agree with those Futures traders and why people trade Futures, such as the ES Mini ?S&P500 contracts. Some disadvantages of Options during Volatile times:

• Costly – More trades or higher quantity means more Fees
• Complex – Here are many factors that affects its pricing. (Demand/Supply)
• Spread – Yes, this is one other factor. You might be right… but
• Time decay – This also affects too.

- Markets are interconnected – Time to move to Futures

And as you all know, there are so many markets and Index trading around the globe, from Nikkei 225, Hang Seng, to UK’s FTSE and Stoxx, and to S&P500. I don’t want to complicate with Commodities and Metals. With the advantages of Futures trading (you will know the differences between Equities /Options / Futures if you trade long enough) and the ability to go long and short cleanly, it is really a overall Huge market. Time to move a part of my strategy to Futures trading, but hedging comes first as priority.

- Portfolio Adjustments

With the cutting of treasuries funds, money was allocated to REIT (after the even extended time for low Fed rates). Corporate debts were also cut, since it is more logical for companies to borrow from banks instead from Wall St. Some late Night Shopping was done, Stocks I wanted to own 6 months ago are now inside my Portfolio thanks to a verb called “Patience”. I have also doubled down on some World / Asian Equities, and since the rebound, they are almost back to the green . Some Funds were also allocated to Foreign Government Bonds too as my safe Haven.

- Currency Hedging

I also took this time to add a new “feature” as I have using SGD (Sing Dollars) to trade the US Exchange, hence I need to convert to USD. For every 10k I have converted, I’ll be hedging 10k worth of Shorts USD / Long SGD, to take away this currency Risk. This will be managed by Spot FX.

- Losses

I’ve taken about only 2% of losses at equities, but close to 7% for derivatives. having realize this, I am a level up on the use of Options, its Leveraged power, and its disadvantages.

This is a snapshot of my portfolio as of 16 August, the day after Google bought Motorola for 12Bn.

Manage money online trading Portfolio 16 aug 2011

This was taken from Google Finance, since my Equity Portfolio can be easily manage while I concentrate on other Strategies. Perhaps this will be updated every quarter

Gempa-Dan-Tsunami-Jepang-20112

Gempa-Dan-Tsunami-Jepang-20111

I have watched in horror when BBC news aired the destruction at above 4pm Asia Time. Onto Cnn.com’s video segment, what I saw wasn’t an 8.9 magnitude earthquake. Its the strong current, huge amounts of water pushing through roads and streets. Water current by itself is harmless, but when you have lots of it, it becomes an unstoppable force.

And I don’t need to repeat what is happening now, the Nuclear crisis. It has caused massive fleeing, and in short, affects the economic developments in Japan. Not to mention the rescue work that is still being done and snow is preventing work from going smoothly.

Now back to managing money and trading. If you had shorted the Nikkei Futures, you would have made quite handsomely. Looking at over the US listed stocks on Japan companies or Asia related stock price, it was shocking to see most of them shed at least 15-30% .

Shorting with the Japan Index wasn’t that difficult. By buying a few puts on iShares MSCI Japan Index (ETF) (Public, NYSE:EWJ), which tracks the Index for Japan, you are actually betting that the index will go down. But because this is traded over NYSE which is on US timing, it somewhat reflects both “today” for Japan, and speculating for tomorrow’s open. A peek over Nikkei 225 Future’s would give you a rough idea how the market will open, since most worldwide economic news would have been overshadowed by the uncertainty in the series of events.

And lastly, I hope things are okay for Japan and Asia, and hope they’ll pull through.

2010 Performance (PrestoHedge Income + PrestoHedge Risk)

Total Assets for 2010: $15888
Total Realized Profit/Loss: -643
Total % Profit/Loss: -6.24% (accumulated monthly)
S&P500 Returns: 11.29% (accumulated monthly)
Beta: 0.8-0.9
Total Alpha: -17.62% (accumulated monthly)

Average for 2010

Total Assets for 2010: $15888
Total Realized Profit/Loss: -643
2010 PnL%: -4.04%
S&P500 %: 7%
Average Alpha: -11.04%

Summary of current Strategies in each fund:
Prestohedge Risk
-Relative Value
-Global Macro
-Long/Short

Prestohedge Income
-Fund of Funds
-Income Funds

I would love to cover this in another article about what retail investors should look out for instead, but if you are savvy enough, my guess is eventually you’ll reach this stage.

This video is called “Hedge Fund Strategies Without the Hedge Fund”, and its right here:

http://www.finweb.com/videos/index.html?297729317

Well in summary, replicating hedge funds is all possible now, compared to last time. BUT, replicating hedge fund returns would be difficult. ie. Shredding 24% total of $ 600 Million, or revving up 40% on some bets raking in $2.1 Billions on some bets. That would be difficult if its based on our small $100,000 seed capital.

Finally, it all depends on knowledge, research, skills, and instruments/tools/products we have access to, such as long / short equities, bonds, swaps, options, futures, global macro investing, short bets, hedging and arbitrage.

Well cover more of stuff for retail investors. Happy Trading!

Taking out the expected return which is random, we are have variables for the stocks metrics, in stock price and stock beta or its sensitivity.

Assuming the Law of One Price states that 2 similar assets classes should have the same prices, one could possibly exploit the pricing differences through a number of reasons.

Now let’s say I have yet another pair of stocks called DPO and DDM.
(Taken from Google finance, its description)

DPO:
Dow 30 Enhanced Premium & Income Fund Inc. (the Fund) is a diversified, closed-end management investment company. The investment objectives of the Fund are to provide a high level of premium and dividend income, and the potential for capital appreciation. The Fund pursues its investment objectives principally through a multi-step strategy. The Fund will purchase the 30 common stocks included in the Dow Jones Industrial Average (DJIA Index), weighted in approximately the same proportions as in the DJIA Index (the Dow Stocks). The Fund will also purchase other securities or financial instruments, primarily swap contracts, designed to provide additional investment exposure (leverage) to the return of the Dow Stocks (the Additional Dow Exposure). The Fund also will engage in certain option strategies, primarily consisting of writing (selling) covered call options on some or all of the Dow Stocks (the Options). The Fund’s investment advisor is IQ Investment Advisors LLC.

DDM:
ProShares Ultra Dow30 (the Fund) seeks daily investment results that correspond to twice (200%) the daily performance of the Dow Jones Industrial Average (DJIA). The DJIA is a price-weighted index maintained by editors of The Wall Street Journal. The Index includes 30 large-cap, blue-chip United States stocks, excluding utility and transportation companies. Components are selected through a discretionary process with no predetermined criteria except that components should be established United States companies. The DJIA is not limited to traditionally defined industrial stocks, instead, the Index serves as a measure of the entire United States market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. The Fund takes positions in securities and/or financial instruments that, in combination, should have similar daily return characteristics as 200% of the daily return of the Index. Its investment advisor is ProShare Advisors LLC.

Now assuming both the shares track the DJI index or the 30 DJI component stocks, we should achieve the same pricing. But because of the asset value and no. of shares on the open market, they are priced differently.

Lets take a look at how to track them to the similar pricing:

With A as DPO, B as DDM, and only the prices and beta are used here:

A = DPO, $10.24, 0.88
B = DDM, $ 49.28, 1.83

A = (A1 * (1/0.88) = 1.136A1)
B = (B1 * (1/1.83) = 0.54B1)

If A = B (Law of one Price if it exists)

(A1 * (1/0.88) = 1.136A1) = (B1 * (1/1.83) = 0.54B1)
substitute with pricing:
A1 = 10.24
B1 = 49.28

Introducing X and Y to get the proper no. of shares, and multiplying Stock beta with share price:
X(1.136* 10.24) = Y(0.54 * 49.28)

X(11.63264) = Y(26.6112)

11.63264/26.6112 = X/Y

X/Y = 26.6112 / 11.63264

X = 2.28
Y = 1

***
For every 100 share of DDM, we should have 228 shares of DPO to be neutral eg. Long/short or market neutral strategies.

EG:
10.24 * 228 = 2334
49.28 * 100 = 4928

With a 1% movement of DJI, DDM should move 1.83%, while DPO should move 0.88%. But even so, the share value of $2334 and $4928 cannot effective reflect this because:

Even with the right 228 / 100 shares

0.88% x $2334 = $20.53
1.83% x $4928 = $90.18

We need to bring the “Price difference” value to be “equal” or equilibrium.

Taking 90.18 / 20.53 = 4.39

It means the value difference is 4.39 of ratio.

Take 4.39 * 2334 (which is also 228 * 4.39) to bring the “difference” value of DPO closer to DDM.

10.24 * 1000 = 10240
49.28 * 100 = 4928

Now, if DJI moves 1%

0.88% x $10240 = 90.112
1.83% x $4928 = $90.18

So in order to create a “hedge” portfolio, or in finding arbitraging opportunities, we should buy 1000 shares for every 100 shares, at that price of $10.24 and $49.28 respectively. This, unfortunately, only exists in theory, since prices are always fluctuating with demand and supply.

We could use a filter such as Bollinger Bands to filter the upper and lower prices and get the average for the long term instead. One scenario I could think of is this (since DPO regularly gives out huge dividends):

Long DPO, Short DDM
but Long more of DPO instead since the beta is lower and it gives out dividends.

Try at your own risk !

Disclaimer: No positions on above mentioned Stocks

That was when portfolios should be having some kind of balance, hedging with some strategies so we can minimize the great pluinge on Long positions. In fact if you manage to pull it off well, protecting the Long side equities positions with some Shorts, minimizing to a lost of 0% or greater, that would make your fund very attractive.

With the CBOE VIX index down to below 30, we see a shift in portfolios. Currently this is my current portfolio:

35% Long-Term Equity (6mth – 1yr)
10% Short-Term Equity (1-3mth)
55% High Yield/growth stocks

In fact I should retain a 10% cash in my portfolio, but instead I went all in to be invested 100%. The 55% of dividend Long positions should cover me some of the loses taken during May where I liquidated some of my positions.

If by mid June the market volatility drops, I am looking at lowering the Yields and Short term term while putting more at the Long terms. Staying at cash is a good idea, for the markets can once again go into volatile and mixed mindset again. That’s when Shorts and Hedging strategies will take place again.

What I have employed now are something very logical and something I had thought of when I started trading. And all thanks to my old brokerage which has very very limited tools, trading back then was like a Buffet’s buy-and-hold strategy only. With my new broker and some great tools, I started applying these strategies, similar to Hedge funds:

• Long/Short equities
• Sector funds (Banking and IT related)
• Fundamental Growth (P&L)
• Short Bias
• Equity market neutral (ETFs)
• High dividends yielding stocks
• Funds of funds
• Event driven news (US financial data)

What could I say anymore ? Do take a look on Google if you want to find out more. But here’s the truth of how I manage. These strategies can be deployed by any retail investor like me and you. Use it well and master it, and I believe a 10-20% gains in a year should be very possible.

These strategies had been proven by the big boys, and so it should be. Besides you don’t need high tech/speed machines or algos because there aren’t high frequency stat arb or quanting involved.