I hope the markets have been treating you all well. Here is the Q2, 2011 update.
A lot has happened since my last post. My primary investor let me know that he was considering a complete withdrawal of his capital. This was of great concern because it meant the end of the fund. Fortunately, he was able to raise what he needed from other sources and decided to wait until December to see what costs were like at that time. He suggested that I use the time to seek out additional capital so that the fund could sustain itself should he withdraw. This was disconcerting because I had already approached everyone I knew to raise the measly US$123K I was already managing.
Some of you may not like my next comment because it is typically thought that spirituality and finance should be isolated from one another. But in keeping with the honesty I have promised from the beginning, I must share this. Sadly, I see very little signs of spirituality in the finance world. However, that is not how it works in my life; God is intertwined in everything I do and so my faith naturally spills into my trading. I started my fund to achieve my spiritual goals and so I turn to the Lord and His Word for counsel in tough times. When the situation I mentioned above occurred, I prayed to the Lord and let Him know that while I preferred to continue managing the fund, I would leave it in His hands. When I did this, it took away any fear or anxiety I had and put me at peace. If the investor withdrew his money, I would take it as a sign that I was not to pursue the path of fund management and would leave it forever. If the money remained, I prayed that He would help me to raise additional capital (and I did not see any likely candidates). Not only did the investor not withdraw (he will reconsider in December when the next stage of costs are due), but a within a few days, a second, unsolicited investor approached me about investing in the fund. He ended up investing US$150K into the fund, simultaneously more than doubling the AUM and removing the threat of fund collapse should the first investor withdraw. I thank the Lord and that man for that blessing.
I have learned a great deal about portfolio management in the 10 months since starting the fund. This was something I never had the opportunity to do because while I had developed a steadily consistent system with a clear edge over the past 5 years, I was only ever able to apply it to a single index rather than multiple indices due to having such limited capital. Without this diversification, downside exposure always loomed precariously. Now, I have the resources to apply the system to over 11 major indices. Beyond the benefit of hedging against unforeseen market events (including black swans), I get to observe first-hand how the correlation of markets fluctuate and influence each other. I have also come to see the challenge in protecting against adverse moves without compromising the benefits of upside moves. I feel like a mechanic that is constantly fine tuning an engine depending on the air temperature, type of track, altitude, etc for that particular day.
A very pleasant discovery was the iShares Barclays 20 Year Treasury Index fund which trades under the ticker âTLTâ. I cannot say enough good things about it as a portfolio hedge as it shares a strongly inverse relationship to the Dow. I started an ET link on its self hedging properties entitled âIs TLT (20 yr bond index) self hedging?â for those interested in my observations.
As mentioned in prior posts, the Fund did not start out well. I experienced âstyle driftâ caused from a self-induced pressure to perform for my investor even though my system didnât provide me with any entry signals. It took me several months of losses before I realized that I just need to trust in the system and it is better to be flat than to lose money. While the fund has been beaten the major indices 2 out of the last 3 months and most months are profitable, I am still making up those losses and will continue to do for the next several months to bring it to breakeven.
The equity curve of the fund has proven to be very stable, smooth and gently sloping to the upside. This is characteristic of historical performance and further verification that I am managing it in accordance with my methodology which was designed to protect capital first and make profits second. I am especially careful to keep a close eye on how much the fund moves each day; I have been successful in limiting the moves to no more than 1% either way in a single trading day. Upside moves tend to be about ½ of what they are for the Dow and downside moves tend to be about 1/8 of what they are to the downside. Correlations to the Dow, Nasdaq and S&P are almost non-existent.
Up to this point, I have used no leverage whatsoever. I am aware that hedge funds can employ great amounts of leverage, but I am not comfortable with the exposure during a black swan event. I am trading through an OptionsXpress account with which I have negotiated very low commissions. OptionsXpress offered me up to 4x leverage, but I declined in favor of continuing with the standard 2x leverage offered in the typical retail trading account. My experiences with OptionsXpress have been good so far, although I recently requested a report that provided my daily balance since inception of the fund and they were unable to provide it due to their database limitations. The fact that they could not provide such a simple analytic underscores the fact that they are not setup to support a hedge fund, even a small incubator fund like mine. I anticipate staying with them for another year or two, but as the complexity of the needs of the fund grow, I may need to seek out a broker with these kinds of in-house capabilities.
Speaking of complexity, I have seen it grow since starting my fund. My spreadsheets and models have grown more complex and the analytics I use to track the fund are becoming more extensive. I am speaking in relative terms because compared to most funds, I am probably still in preschool.
One lesson I have learned is on how to handle testing and development of new trading ideasâ¦I am now very slow to introduce them into the real time trading of the fund. My testing period has become much more arduous and I use a Collective2 account to test the ideas and have them tracked statistically. I intend to give these ideas at least 6 months of real time trading before utilizing them in actual trading.
I know I have found my passion because I canât wait to get up in the morning and see what the market has in store. I absolutely love what I am doing and hope I can one day do it as my sole profession. I wish you all the same. Thank you for reading this post and best of luck!
Be well.
