In our March Active Indexer, "Knowing Your Portfolio Limits," our view was to add equity beta. Five weeks ago, the biggest risk in hedged portfolios was too little exposure to stocks. We acted by reducing short (inverse equity return) exchange-traded funds (ETFs). A few days ago, we closed at 852.06. Is having too little beta still risky? No. After having rallied nearly 30% off the prior low, it is as risky to have too little as it is to have too much beta. Beta neutral is just about right.

Our objective over the next few weeks to months is to balance equity/bond beta with a tilt toward owning assets that source positive beta during inflationary bust periods (see Reflexive Asset Allocation, April 2009, InPerspective). We are also concerned about positioning assets for a huge rally that could take the S&P 500 to about 1,100 over the next few months. Below are some likely trends.

We are in a secular bear that recently began a cyclical bull. The S&P is probably (not certain) going to correct back to 835 - 840 and then stocks are going to:

• retest the March 2009 and November 2008 lows by trading down into the 667-741 range and then enter a secular bull market after a couple of years of successfully retesting prices near 741,
• rally to near 1100, fail and then successfully retest 741-839 (the October 2008 low) over the next few years and then enter a new bull market, or
• fail in the 850-950 zone over the next few weeks and then set new lows below 667.

We are satisfied to be correct about our price trend forecasts, but technical analysis is best at identifying likely price trends. It is not as good at estimating when trends will change or how long they will persist. The above exercise helps us to pay attention to price levels that call for a modification in asset exposure. Remember, we are speculators seeking rewards (alpha).

Model Portfolio: The Arrow Insight (AI) 75-50 Portfolio

Long/Short Exchange-Traded Funds & Closed End Funds (CEFs)

AI's Axiom: "Capturing desired source returns while avoiding unwanted beta and limiting default risk."

Primary Objective: 75% of the market's (S&P 500 Index) positive and 50% of its negative returns over 12-month periods. This profile drives the model's strategic allocation and tactical trades.

Secondary Objective: The portfolio satisfies a need to employ a capital originally allocated to hedge funds into a proxy but without their baggage (excessive fees, limited transparency, illiquidity and high business risk). Consequently, AI 75/50 has an absolute return objective consistent with meeting our primary objective over 36-month rolling time periods.

Summary Objectives: AI 75/50 first seeks capital appreciation while attempting to provide positive returns over all 36-month time horizons since the portfolio's inception date on March 19, 2004. The portfolio also attempts to best the returns of the S&P 500 Index (S&P) and The Hedge Fund Research (HFR) Investable Global Index (HFRX) during these periods.

Recent Returns:

As of the trade week ending April 9, 2009, month-to-date (MTD) we are down 0.1%, while year-to-date (YTD) up 5.7%.

Because we are late with the release of this issue of InFocus, Figure 5 returns are through April 15, 2009, which are 0.3% MTD and 6.2% YTD.

Returns for the last three calendar years were -2.2% in 2008, 8.8% in 2007 and 18.3% in 2006. Since the portfolio's inception, the cumulative return has been 51.6% (Figure 5).

Weekly Trades, Current Positions, Indexes & Asset Classes

Since our last Infocus on March 27, we increased our portfolio exposure to the ProShares UltraShort MSCI EAFE (EFU) by 2% (4% after leverage). Pending good-until-cancel (GTC) orders are to sell EEV at $33.50, half of EFU at $130, and half of SCC at $73.42 and half at $115.

Figure 3 reviews major index and asset class fund returns for the trade week ending April 9, and MTD and YTD through April 14. Here we also list the AI 75-50 Portfolio's over weight, (OW); neutral (N) or, under-weight (UW) positions relative to the Dow Jones Global Stock Index.

Figure 4 plots the prior week's returns by index and asset class exposures. Short exposures are highlighted in red. Shorts are sourced through the embedded leverage had by double inverse ETFs and from directly shorting ETFs. Long positions are colored green.

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