WheelieDealer Share trading diary blog with Portfolio and Education
  • Home
  • Trades
  • Educational Blogs
  • Wheelie's Bookshop
  • M3 Manifesto
  • Portfolios
  • WheelieBin / WheelieWatchlist
  • Non-Finance Books
  • Beginners
  • Monthly Performance
Picture

educational blogs

It can get quite Uncomfortable sat on a Spiky Hedge

13/4/2016

10 Comments

 
Tweet
Normally when I bash out a Blog I have some sort of plan scribbled down on paper to help get my thoughts aligned and half sensible. However, tonight I was making a cup of Tea (one of about 300 I usually slosh back each day, not to mention the Coffees), and thinking about some discussions on Twitter and it struck me there was a Blog to be written about the pain I am suffering from my FTSE100 Short Hedges which are certainly testing my resolve !!

I am sure many Readers have seen my huge Blog about Hedging and have a reasonable understanding of what it is all about - if you haven’t had the misery of reading it, then click on the ‘Category’ ‘Hedging’ and you should find it.


My Hedges
If you look at my ‘Trades’ page on the Website, you should be able to see that I put on lots of Short FTSE100 Spreadbets and a XUKS FTSE100 Short ETF earlier in 2016 when things were looking pretty bleak and I was already concerned that this would be a tough year because of the Brexit Vote. The most frustrating thing for me was that I missed putting some Hedges on just after Xmas when there was a very clear ‘Sell’ Signal given by an Inverted Hammer Candle etc. and I remember tweeting out that I thought Indexes were about to fall. However, my view was that around Xmas and New Year the Volumes are light and that any drop would be small and not worth bothering to Hedge - it is the Lesson from this that any clear Sell Signal is just that, irrespective of Volume, and it would probably be wiser to at least put a small FTSE100 Short on to Hedge a bit of Downside out.

At the time I put most of my Hedges on, Markets were in a right mess and Commodities in particular were very broken and Oil was just dropping like  a Stone. Of course I considered the Risk that I was putting Hedges on right at the Bottom but these things are very difficult to predict and my overall driver was to remove the Downside Risk - it is Downside Risk that kills Portfolios, not Upside Risk (unless you have Shorts on that are too big !!).

At the time of placing my Shorts, I fully considered the various Scenarios and ran several ‘What if?’ Scenarios with regard to how my Portfolio would be impacted if the Shorts went against me and rallied 600 Points or whatever. I always do such Scenario Planning and I really recommend it as a way of thinking about how things can pan out when they go against you - this is very important when Hedging using Leveraged Spreadbets as they can munch up Cash quickly if they go the wrong way.

After I had put a few Shorts on, I was carefully monitoring the Performance of my Portfolio every day and trying to weigh up how much more Short I should put on to make sure I had very good coverage in case Markets started to Drop - as I did this monitoring, I was pretty sure I needed to add to my Shorts and that is what I did.

Needless to say, that seemed to work pretty well in recent weeks and my Portfolio was fairly static in its Value with the Longs and the Shorts offsetting one-another and keeping a nice Balance - so it was like I was 100% Cash and ‘Market Neutral’. However, as these things always do, in recent days and last week also, the ‘Balance’ seems to have gone awry and I am finding that my Shorts are losing Money hand over fist but the Longs are not fully offsetting this - it is a right pain !!

I think the Lesson here is that it is better to be a bit light on the Shorts than to try to Hedge exactly and end up getting it a bit wrong like I seem to have done. In terms of pure monetary value, my Shorts are about 65% of my Longs so you would think that there would be reasonable balance there - but in reality it is not working so well. The problem seems to be caused by the FTSE100 Rally being driven by only a few Sectors in the main - and they are rocketing. It seems to be Banks and Miners (and Oil) that are shooting up and this means that my Long Portfolio, which is a mix of stuff both in terms of Sectors and Market Capitalisations, is not offsetting the Shorts because in aggregate my Longs are not moving up as fast.

I will add here that when I talk about my ‘Longs’ I am not including my Income Portfolio which I do not monitor on a Daily or Weekly basis - in reality, this will have done quite well in recent days and this will be helping me a little bit.

Where does this leave me
The beauty of Low Interest Rates is that keeping FTSE100 Short Spreadbets running over long periods is not all that costly - this means I do have time to exit the Shorts at an appropriate time.  Markets have had a superb rebound since the malaise of January and April is notoriously a very strong month - second only to December. I am already sensing the mood of people on Twitter changing and everyone seems to be a Bull again and getting stuck in on the Long Side - this makes me think this is getting towards the end of the Rally - and with the Brexit Vote on the 23rd June, it’s hard to see the Summer being a good time for Stocks.

My main reason for Hedging my Portfolio this year is because of the Brexit Vote and it is fair to say that the Macro Economy worldwide looks rather ropey - so I am happy to keep my Shorts running, but I would prefer it if my Stocks offset the Shorts a bit better !!

It’s a weird situation because by being Net Short to a small extent at the moment, I am in effect taking Losses now that should be reversed once Markets decide to drop again - of course, my worry here is that on the way up my Shorts are probably oversized, but on the way down they might not be big enough !! In other words, my Longs might fall faster than the FTSE100 falls - this is unlikely but it might happen and that would be really irritating !!

There is something for Readers to think about here as well - many will have big grins on their faces and be really pleased with the recent Gains they have made - but it is vitally important to lock in some of these Gains by Selling soon - this Market will not rally forever - they never do. It would be really annoying to watch your Portfolio run up in Value only to see it all evaporate again when the Market Mood changes - make sure you Topslice or whatever you do to lock in some gains. Dare I say it, you could even Hedge a bit !!

I have said for some time that this is a ‘Traders’ Market not a ‘Long Term Investors’ Market - this is precisely what I mean by the importance of making sure you bank some gains. Don’t get greedy.

Conclusion
It was pretty obvious to me that April could be a strong month and holding my Shorts could be painful - but it is very difficult to know exactly when the Rally will end and the simple fact that I am feeling distinctly uncomfortable makes me think the Market is getting near the time to be Selling. As I have written in my usual Index Blogs, I see the Brexit Vote as putting a big downer on the Markets and the usual “Sell in May and go away…..” adage will probably be proved true this year as it almost always is. There are a lot of people sat on some lovely fast gains and they will not need much provocation to make them hit the ‘Sell’ button.

From a Technical Viewpoint, there is a lot of Resistance coming up soon on the FTSE100 and on the Oil Price chart - it will be very difficult for the Markets to wade through this when Summer is just around the corner and we are about to leave the EU. Needless to say I will keep looking at the Indexes and doing some Charting Blogs to investigate how things develop in coming days/weeks.

So, I am going to grin and bear it and keep monitoring my Portfolio Value and assessing the likely impact if the Markets continue to rise - the beauty is that my Portfolio is not bleeding too much as the Longs are doing some good work to help reduce the pain. I have actually considered adding a little more on the Short side but I think this is very much a last resort and I can only do this once my certainty level is extremely high - to add to the problem would be silly really.

If Markets do not drop prior to the Brexit Vote, then it is extremely likely that we will have another big Sell-off in the Autumn around September/October and I will be able to escape the Shorts then if need be. It is not an ideal situation, but I think closing the Shorts now would be a huge mistake as you can guarantee that if I did this, then the Markets would fall off a cliff about 2 seconds after I hit the ‘Close’ button !!

Hey, it’s not easy being a WheelieDealer you know !!

Cheers all, happy hunting, WD
10 Comments
Zyg Suzin
13/4/2016 11:58:13 pm

Hi WD, I found your blog v. Interesting but that is not unusual as all of them are interesting. I have a very much similar approach to as that I hedge rather than do a massive a massive sell or top-slice! Though I did a bit of selling to lock in profits.

The shorts on the face of it look pretty sick, however as you know
I sometimes do short term trades in FTSE100 and DAX to additionally offset the hedge when it is going against my portfolio. I have to admit it is not easy and sometimes I get it wrong or don't give it enough attention but on balance it is proving to be effective.

thanks for the blog once again. like you I am ready, IMO when the market turns down

Reply
WheelieDealer
15/4/2016 11:10:29 pm

Hi Zyg, thanks for the comments on the blog. Your strategy to trade Indexes on the Long side a bit seems to have worked very well - as you say, it takes practice and you will get stopped out now and again.
Like you I am loathe to sell too many of my good stocks especially because most are Divvy Payers that I don't want to miss out on - Hedging gets round this problem - but if you get the 'balance' wrong, it is awkward.
Cheers, WD

Reply
catflap
14/4/2016 07:24:24 am

Thanks for the update and frankness over your hedges. Its really helpful. I glad i read the warning on your website and didnt follow your "advice"!

Looks like its shaping up to be an interesting year, if anything else. I doubt the volatility has ended.

Reply
WheelieDealer
15/4/2016 11:15:34 pm

Hi catflap - thanks for your appreciative comments - I am very happy to open up about when I cock stuff up because it is very helpful to force me to think about such things and it acts as a Stick to beat the Lessons into me !! As you say, no one should take my stuff as 'advice' and my Website and stuff should be used to make people think about how they do things and I am sure my thoughts and results are a useful measuring stick that is not usually all that available. Many 'Gurus' tend to cover up their mistakes I suspect and they lack the openness and some are so good it is useless us ever trying to emulate their achievements. We are not all Warren Buffett (sadly)....
As you say, 2016 has certainly started off in an 'interesting' way and I suspect we ain't seen nothing yet (as per Bachman-Turner Overdrive !!).
Cheers, WD

Reply
Ed
14/4/2016 02:40:08 pm

I think you have been a bit unlucky and I am struggling to see a reason for the recent rise in the markets. A rush to buy is generally followed by a rush to sell. I wimped out and sold my XUKS last week but the higher the markets go the more I will think about buying back again. Does seem that the UK market is not as strong as the others though, so a few polls might see a drop over the next few weeks.

Reply
WheelieDealer
15/4/2016 11:19:00 pm

Thanks Ed, it does seem like the worst possible scenario for my Hedges has actually played itself out and made things unpleasant for me - as you say, sharp runs up tend to be followed by runs down so chances are I will escape without too much pain in the end. It is not ideal but that is how it goes sometimes. It does strike me that the Rally is only in a few Sectors and there is no breadth - this means any Pullback could be sharp. With Brexit Vote coming up it is hard to see much more Upside in the short term.
cheers, WD.

Reply
BenS
15/4/2016 06:12:39 pm

Hi.
Very informative and honest blog. I haven't been putting much cash into the market in 2016 - I did buy Aberdeen Asian Income IT because I felt that the asian market would recover/it was on a large discount and generated a 6% yield. There has been quite a bit of capital growth from this since i bought which is a bonus. I also bought MYI (Murray International Trust) for the yield and access to global markets.
I haven't hedged but do have some money in gold via HUM and GPM (Global Precious Metals) which have worked extremely well so far. I'll stick with these as a hedge away from the UK and into precious metals in case of a crisis!

Reply
WheelieDealer
15/4/2016 11:23:21 pm

Hi Ben, I remember us discussing this in the Boozer - your stance to 'hedge' via Cash and Gold has worked very well. It certainly doesn't seem like a Market to be buying with any rashness except for the Short Term Traders - hopefully they will get out in time to bank the fast Profits.
It's hard to know if we will get a full blown 'Crisis' and that is probably unlikely for a while - but I struggle to see how Markets can run up much more in the face of the trouble a Brexit could cause. Even the IMF has told us that Brexit will cause big trouble and many Investors will be wary.
Thanks for the feedback, WD

Reply
JonH
18/4/2016 05:11:30 pm

I find that very often I get things right but at the wrong time. So I sell too early or too late, And in this case I bought XUKS FTSE100 Short ETF when the market was at its lowest with dire predictions of where it might go. I did not buy a lot and have since sold half. I have also sold half of my house builders seeing how they have recently fallen through the 200 day moving average following a very good run.

Thanks for your analysis, your actions and outcomes. It's always a good read and makes me consider my own decisions

Reply
WheelieDealer
18/4/2016 09:40:50 pm

Hi Jon, Thanks for your thoughts and comments. I think the timing thing is a big issue for most of us - it is very difficult to get spot on and the only partial solution seems to be to Scale-in and Scale-out of Positions. Interesting you are using the 200 Day MA rule - I know a lot of 'Traders' who use a similar technique, or the 10 Month MA rule.
Great to hear that my spiel helps your thinking - it certainly helps mine !!, Cheers, WD

Reply



Leave a Reply.

    'Educational' WheelieBlogs

    Welcome to my Educational Blog Page - I have another 'Stocks & Markets' Blog Page which you can access via a Button on the top of the Homepage.

    I hope you find the Entries here thought provoking and valuable. There is a sizeable Archive starting to build - use the Filters below to take the full benefit. If you have just Landed on this Page, feel free to have a poke around at the rest of my Website (s)....WD

    Blog Index List  now sits on the WD2 Website - click the Button below:


    BLOG INDEX LIST

    Archives

    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014

    Categories

    All
    Accounting
    Beginners
    Bonds
    Book Reviews
    Business Information
    Commodities
    Conference Reports
    Danger
    Events
    FOREX
    Fundamental Analysis
    Funds
    Getting Started With Stocks
    Guest Blogs
    Hedging
    Income Portfolios
    Information Sources
    Interviews
    Investment Strategy
    IPO
    Macroeconomics
    Manifesto For Making Money
    Market History
    Market Structure
    Non-Finance Books
    Peer 2 Peer Lending
    Politics
    Portfolio Management
    Psychology
    Retirement/Freedom
    Scores On The Doors
    Selling Rationale
    Short Term Trading
    Social Media
    Spreadbetting
    Stock Buy Rationale
    Stock Ideas
    Technical Analysis
    Templates
    Tools And Techniques
    Trades
    Trading Products
    WD Messages
    Week Ahead Indexes


    Please see the Full Range of Book Ideas in Wheelie's Bookshop.

Powered by Create your own unique website with customizable templates.
  • Home
  • Trades
  • Educational Blogs
  • Wheelie's Bookshop
  • M3 Manifesto
  • Portfolios
  • WheelieBin / WheelieWatchlist
  • Non-Finance Books
  • Beginners
  • Monthly Performance