Although Index Universe has posted additional Active Indexer articles since Defend & Advance (published in March 2008), none has reviewed the performance of Portfolio A, a long/short allocation serving as a model portfolio for private wealth (a large family office). Portfolio A attempts to display 75% of the market's (S&P 500) positive and 50% of its negative returns over 12-month periods. This performance profile drives the model's strategic allocation and tactical trades.

Going forward, the model's title is the Arrow Insights (AI) 75-50 Portfolio. AI 75-50 may or may not experience lower risk than the market. The AI 75-50 Portfolio is not appropriate for investors with time horizons that are less than three years.

AI 75-50 satisfies a need to employ a capital originally allocated to hedge funds into a proxy. This need resulted from my displeasure with hedge fund managers, which led to the pursuit of an alternative with clear performance objectives but without 2% management plus 20% incentive fees (2 & 20), limited transparency, low liquidity and business structure risks. In March 2008, Defend & Advance expressed these concerns and backed them up with expert opinions.

Future Active Indexer columns will report monthly performance updates and trade ledgers. A monthly format will be shorter in narrative with more attention paid to allocations and trades. This installment will be longer than forthcoming ones because we are bringing readers up-to-date on current views and portfolio moves made since March 2008. At this time, we will review the origin of our defensive posture, the universe from which we trade and how we maintain beta/non-beta diversification in this age of heightened default risk.

Looking Backward To Move Forward

Let's look backward to understand allocations made to themes (sources of return) expressed through long and short exchange-traded and closed-end funds (ETFs & CEFs). The Active Indexer has promoted Defense since it first appeared on these pages in July 2006. The whys and how have been articulated since then. Let us begin with a quote from our first article, which was in the midst of the market's first correction since March 2003:

At times, the model has expressed a defensive posture through overweighting high-quality assets (HQ) securities while underweighting and shorting assets with lower fundamental qualities (LQ), primarily price-to-earnings, free cash flow, price-to-book and dividend yields. It also has allocated more than half of gross exposures to anti-carry trades (long-short currency positions that profit from deleveraging) and U.S. dollar themes. Next month, we will cover more on these themes.

AI 75-50 sources return from equity-bond beta themes and no-beta themes. Beta is beta; it matters not if it is sourced from long or short positions. Beta is sourced from equity and domestic bonds, which include country and regional ETFs-CEFs such as Brazil (EWZ) and Southeast Asia (TDF). Non-beta is sourced from assets that have historically displayed weak price correlation to domestic bond and domestic-foreign stock indexes. To date, our non-beta universe has employed global bonds, currencies, gold and gold stocks. For example, global bonds recorded a -22 twelve-month correlation (R) while EAFE & the S&P 500 have displayed +.27 and +.48 Rs to the CSFB-Tremont Hedge Fund Index since 1993. One of our objectives is to source less beta than hedge funds. This is important when they morph into asset gatherers that have lost sight of their absolute return objectives. We reference correlations relative to hedge funds to manage our objective to source less beta than what is emanating from the 2 & 20 crowd.

Previous Page

1  |  2  |  3  |  4  |  5  |  6  |  7  |  8

Next Page