Monday, January 26, 2009

For GT Blog January 26, 2009

In bear markets some degree of portfolio insurance is a prudent act

We can seek out assets that have a tendency to operate inversely to the broader market direction. The choices could be cash, stock short sales, gold, bonds or one of those fancy inverse exchange traded funds.

In the US we have the DOG (short Dow) and in Canada we have the HXD or the Horizon BetaPro TSX60 Bear

There seems to be a little glitch - they don't seem to work

According to Horizons BetaPro Management Inc. these products are to "PROFIT or PROTECT in Bull and Bear Markets"

Note during the window of Sept 17, 2008 to January 06, 2009 the S&P/TSX declined by 20% - over the same period our double inverse ET F returned only 3%

OUCH!

8 comments:

sg.sean said...

That's because of the leverage...I've had this discussion with others. If you start with $100 and it goes down 10%, HXU goes to $80. If the market goes up 10% the following day, the HXU goes to $96. Punch this in your calculator for 10 days and see what happens...the market goes nowhere and you lose 18%-20%. The bottom line is that these are good for daytraders and 1-2 day swing trades only.

chrispycrunch said...

Any reason why? Someone (i forget whom, on financial post) wrote that beta pro shares don't perform as advertised.

DowTheoryRules said...

As far as Horizon Beta Pro products go, many traders I know welcomed these when they came out and we traded them profitably. Then, when volatility exploded as everythng crashed, they totally stopped working. I understand that they use options to obtain the double exposure and these options are very expensive when volatility increases.
However, I was absolutely stunned to see both Bear and Bull products going down at the same time. I have contacted the managers at Horizon Beta Pro, but their answers did nothing to alleviate my fears that these products do not work.
Check out HGU and HGD, HXU and HXD (which are supposed to act inversely) and many others in the fall of 2008. What a joke.
DowTheoryRules.

conrad62 said...

I can verify that holding a HORIZON BETAPRO PRODUCT does not work in your best interest using a much more recent example.
Last Friday when Crude Oil shot up to a closing price of $46.47/bbl, the Horizons HOD (Crude Oil Bear) closed at $22.92. This Monday morning, with the price of crude UNCHANGED, the HOD was down over $1.00, and did not reach break-even until Crude was down around $0.60/bbl from Friday's close!
Go figure.

conrad62 said...

I can verify that holding a HORIZON BETAPRO PRODUCT does not work in your best interest using a much more recent example.
Last Friday when Crude Oil shot up to a closing price of $46.47/bbl, the Horizons HOD (Crude Oil Bear) closed at $22.92. This Monday morning, with the price of crude UNCHANGED, the HOD was down over $1.00, and did not reach break-even until Crude was down around $0.60/bbl from Friday's close!
Go figure.

Gettingtechnical.com said...

Hello chrispy

You are correct the item was

Leave bull and bear ETFs to day traders - Al Rosen, Financial Post Published: Thursday, December 11, 2008

I learned of this just yesterday

BC

Gettingtechnical.com said...

Hello DowTheory

Thanks - I am looking into this - the problem also exists in the US - the short Dow (DOG) is tragic with a 3% gain over the last quarter with the Dow down 20%

I am commenting on Dow Theory this Friday (or Saturday) in the Toronto Star

Dow Theory does rule

BC

Canadian Money said...

Your comparison is mathematically correct as far as it goes, but...

What if $1,000 was invested, for this same time period, in either of the noted investment alternatives?

TSX 60 I Shares (-20%)

$1,000 goes to $800

HXD TSX 60 Bear ETF (+3%)

$1,000 goes to $1,030

The difference between the two alternative portfolios

$1,030 - $800 = $230

If my math is correct…

The “bear fund only” portfolio choice produces +23 % portfolio improvement (230/1000)

The improvement is due to the sum of "the loss that was avoided by not being in the long position" plus the small gain from the bear fund. It creates a real 23 % improvement to the portfolio.

To be fair here, for the time period you selected for comparison...cash in the mattress would have performed almost as well.

Taking this one step further...if one selected a different time span within the same time period shown, for say Sept. 17 to the November low...the bear fund would look a lot better as both an insurance policy and as an alternative investment vehicle.

Again, if I have my math correct...
Taking values from the posted graph, it looks like –32% for the I-Shares and +66 % for the bear fund. About 17 to 11.5 and 24 to 40 respectively.

The net difference with this timing would be in-the-order of a +98 percent portfolio improvement.