It can get quite Uncomfortable sat on a Spiky Hedge

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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