The hedging company

For the moment I am not adhering to the strict deep value strategy. I am very pessimistic about the upcoming months, and am waiting for a large correction soon. This week we have seen four consecutive days of 1% gains in the large indexes, and that is preposterous to me. I am not sure when this bubble is going to burst, but I have positioned my portfolio to be cash heavy, and all my bets have some form of hedging associated with them.

Of the portion of my portfolio that I am investing, roughly 70% of the funds are in long-dated options expiring in December or January. The implied volatilities are slightly larger than normal market conditions, but laughable when you consider how bad things can become. Thus my hedged positions also double up as volatility plays.

As for sectors, I am net long the healthcare and basic materials sector and net short natural gas.

My strategy is about relative value. Look for companies within sectors that have some momentum, good fundamentals, decent future prospects, and have lower beta relative to the sector in bad times. Holding period is 6 months, in which I will screen for new long/shorts and turnover 50% of the portfolio every 3 months. Long the company, short the sector.

Simple enough, we'll see how it performs. I turned over the portfolio to this strategy 06/28/2011, and so far I am net positive 1%. I will update regularly.