Wednesday, April 19, 2017

Equity Management #9 : Long-short equity investing.

For the next few years, I will be stretching myself beyond the usual yield investing which has been instrumental in allowing me to reach this current of financial independence. One of the approach I am toying with is the use of leverage, I hope to start building a small portfolio which has a modest amount of leverage to magnify my dividend yields.

The longer plan is to look at long-short investing. There are three ways to do this :

a) Market-neutral strategy

This strategy balances your long and short positions. The dollar value of your long and short positions are equal to each other. When craft a portfolio like this, there is no net market risk and your returns will be your gains from stocks which appreciate in your long portfolio and depreciate from your short portfolio. This is pure double alpha.

b) Equitized Strategy

This takes a long-short portfolio and you overlay this with a stock indexed futures position. So overall, you can get back the 6-7% from the STI index and you also earn a kicker from your market neutral portfolio.

c)  Hedge Strategy

Hedge fund managers enhance the equitized strategy with by varying the risk to market by changing the number of futures held on the stock index.

At this moment, I am not really sure how shorting would work beyond clicking the Contra checkbox when making a sell order but I do know what readers can attempt if they want to explore this option further.

We have a lot of gurus and great investor education providers but they seem only focused on taking up long positions. Ask these experts what they would do if they were made to craft a short portfolio by reversing their stock picking methodology.

Can we backtest a portfolio of low earnings yield, high price to book value stock with negative free cash flow?

This can be a source of additional returns and be the first step towards starting a mini hedge fund operation on your own.





2 comments:

chewyc said...

Hi Chris

I have a dumb question.

What instruments would you proposed to execute the short in the long/short strategy? Borrow Shares, CFDs? For example, if sheep like me follow certain research reports… and using the below example for 130/30 long short strategy

Long Keppel Corp/ Short Noble

What instruments can we use to execute the above trade?

I am not sure if we can simply pull all the money out from the short trade and put it into the long trade. Wouldn't the brokers want their clients to maintain a margin?

Christopher Ng Wai Chung said...

I really want to be able to answer this question myself because as a personal policy I do not short the markets.

You can short bonds by simply applying for a margin account but to short equity over the long term, I have no idea how to start.