Fundamental valuations lead him to what corners of the market appear most attractive. Then, he applies technical factors to determine when to enter long positions and also to determine how much of a bet to make on a particular fund at any given time.

"Where I get nimble and use technical analysis the most is on the short side," said Serrapere.

He never wants to take more than a 170% gross portfolio position. That means if he ever goes 100% long, he'll never take short positions of more than 70% at any given time. "I did some backtesting and evaluated hedge fund managers over the years. Once you go over that level, your volatility gets too out of hand," said Serrapere.

Nor will he take less than a minimum gross position of 70% in portfolios, he adds. That means Serrapere will go into "hiding" in a 30% cash position at times. "When I've really got a lot of conviction about the market, I'll go to 170% long-short," he said. "Right now, I'm at 145% gross: 40% short and 105% long."

For the first time ever, Serrapere's shorting Treasuries. "It's not a huge position, but I'm slightly shorting an ETF," he said, adding that he's using the UltraShort Lehman 20+ Treasury ProShares ETF (NYSEArca: TBT).

In the next 20 years, Serrapere expects stocks to earn 7%-9%. And in the next 10 years, he cautions that Treasuries could actually produce negative returns.

Corporate bonds, however, seem to be headed in an entirely different direction, says Serrapere.

"A few weeks ago, corporate bonds were being priced for a depression with expectations that default rates would soar," he said. "But that's highly unlikely. Basically, I see that by combining high-yield and investment-grade corporate bonds in a portfolio, you have an opportunity to earn equitylike returns over the next 10 years."

In times of extreme volatility, Serrapere says he tends to invest in funds with a three- to six-month time horizon. "The last three months have been the most volatile period ever in the market. It has been equal to about a 70% annualized standard deviation rate," he said.

Serrapere tries to keep annualized turnover to around 50%, he says. But market fluctuations in the past several months could boost that rate by threefold.

Choppy Trends

"Positions I expected to produce returns in a month or two are moving so violently now that entry and exit points—especially on short positions—are taking a much more nimble form," said Serrapere. "My technical overlays are telling me that trends remain very choppy."

Valuations are at the point, though, where he's looking to take longer-term positions. "The way I'd invest going forward is to accumulate long positions and not to trade those. But I'm going to hedge them, staying very nimble," said Serrapere.

He added: "I'm looking at some funds now that could be held for years. The market has gotten to a point where everything's so cheaply valued, plenty of opportunities are available."

Serrapere admits that active trading presents a high hurdle for investors to overcome in terms of transaction costs. "If you're not consistently able to achieve high absolute returns, it's not worth being an active indexer," he said. "The only way it makes sense is if you can make hedge-fund-like returns over time. But I think you can beat hedge funds using index funds simply based on costs alone."

With all of the options ETFs are providing, active indexing can now be used as a strategy to replace hedge funds in portfolios, adds Serrapere. "Three years ago, I couldn't be doing what I'm doing now. ETFs have given us all the tools we need to be more active. You don't need a hedge fund manager anymore to build portfolios implementing long- and short-term strategies," he said.

Murray Coleman is managing editor at IndexUniverse.com. He welcomes comments and suggestions for future columns at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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