Bread Vs. Cake Part II

October 22, 2009


AI Portfolio Performance (Objectives should be evaluated over 36-month periods)

Like the Hedge Fund Research Global Hedge Fund Index (HFRX), AI’s secondary objective is to provide an absolute return (consistently positive returns). As of Oct. 19, 2009, hedge funds and the S&P 500 are down -16.1 percent and -25.7 percent, while the AI 75-50 Portfolio is up 19.1 percent since the October 2007 peak. The AI 75/50 model has outperformed its benchmark, the HFRX and the S&P 500 during all periods shown in Figure 11.



AI 75-50’s primary objective is to capture 75 percent of the S&P’s upside and 50 percent of its downside, which requires us to hedge beta nimbly while maintaining core beta (equity and bond exposures). The portfolio’s 13.6 annualized standard deviation (ASD) is higher than that of the HFRX, but much lower than that of the S&P’s volatility since the market peaked in October 2007.

Recent Trades, Open Orders And Current Positions (Percentages are relative to gross exposures)

All positions and our strategy view for all holdings are listed in Figure 13, along with our beta/non-beta allocations and themes (see the February InPerspective for more).

We were up 0.3 percent for the month in September 2009.

Our gross YTD return as of Sept. 30, 2009 was 15.2 percent and 18.8 percent through Oct. 19.

In September 2009, we made four trades. So far, in October 2009, there have been five trades (Figure 12).



Open orders: We have orders to initiate a 7.5 percent position in QQQQ at $39 plus 7.5 percent more at $37. There are additional orders to buy 6 percent more of the JP Morgan Alerian MLP Index ETNs (NYSEArca: AMJ) at $23.

Forward-Looking Trades

We will sell 10 percent of TBT at $64 if it ever hits this price (rebalance).

We will be looking to short IYR near $48 and RTL near $23. IYR and RTL will each represent 4 percent of our gross exposures, which would give us a 12 percent short position in real estate stocks after accounting for JRS.

Twenty percent of GLD will be sold if gold hits $1,250 per ounce. Twenty percent of gold stocks will be sold if the Market Vectors Gold Miners ETF (NYSEArca: GDX) hits $75.

Gold recently ended a midterm secular consolidation begun in March 2008 with gold trading from $640 to $1032. After a commodity has been in a bear market for decades, as gold was from 1982 to 2001, a very wide consolidation range usually ends with a big scary washout of all the boys, leaving only MEN to buy. We got this washout in the fall of 2008, and we then tested the 1000-1032 range and failed three times. Last month, when I was in
, the land of gold bulls, too many investors at the Canadian Hedge Watch conference were expecting another failure near $1,000.

Recall that in September, we added 3 percent more of to GLD to the Arrow Insights 75/50 Portfolio. Even one of the best P&F technicians at Investors Intelligence called for gold to fail near 1032 on Tuesday of last week. It broke to new highs the next day.

Another adviser emailed recently and asked me to consider this: "In September, the Hulbert Gold Newsletter Sentiment Index (HGNSI) stood at 25.2 percent. Yesterday with gold nearly $100 higher, the HGNSI fell as low as 18 percent!"

A rising market with fewer bulls is a rare. It is usually bullish when accompanied with breakouts and good fundamentals, which are also bullish but not covered here.


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