Long/Short Models Doing Exactly What They Should Do

New York (HedgeCoVest.com) – The last three months have been anything but stellar for the overall stock market. If we look at a chart of the S&P 500 from April 28 through July 28, we see a number of peaks and valleys, but the index hasn’t moved very much. There has been lots of movement with very little progress. On the chart, the red line represents the closing level for the index on April 27 and as you can see, in the three months that followed, the ups and downs look huge, but in reality all the closing levels are in an 85-point range. 


Given the rollercoaster type action (albeit a baby rollercoaster), we wanted to look specifically at how the HedgeCoVest Long/Short models have performed over the last three months. From an overall perspective, the models have performed very well. The table below shows four of our five composite models and their relative performance. The only long/short model not included was the REITs Long/Short model and it was excluded because it isn’t one of the ten main sectors.

Sector SPDR Select ETF HedgeCoVest Model 3-month Return ETF 3-Month Return Model Differential
Materials XLB Materials Long/Short Model -9.95% 11.30% 21.25%
Energy XLE Energy & Utilities Long/Short Model -13.81% 0.01% 13.82%
Technology XLK Technology Long/Short Model -1.94% 0.11% 2.05%
Healthcare XLV Biotech Long/Short Model 4.08% -1.14% -5.22%

If you look at each sector and compare the performance of the Select Sector SPDR ETF against the coinciding HedgeCoVest model, you see that three of the four models have performed better than the ETFs. The lone model that didn’t outperform the ETF was the Biotech Long/Short model. The Materials Long/Short model and the Energy & Utilities Long/Short model both blew away the long-only strategy provided by the ETFs. In the case of the Materials model, the performance differential was 21.25% and for the Energy & Utilities model the difference was 13.82%.

The choppy back and forth action the overall market has experienced is the exact environment where good long/short strategies excel. The combination of timing and stock selection both come in to play.

To illustrate that point, let’s look at the Technology sector in particular during the 90-day window we are talking about. Of the ten main sectors, the tech sector was the one with the most neutral performance with a loss of 1.94% during this time period. If we then look at the top ten holdings of the Technology Select Sector SPDR (XLK), we see names such as Apple, Facebook, Google and Microsoft. From April 28 through July 28, six of the top ten holdings were down and four were up and the range of performances were considerable.

The top performing holding in the XLK during this window was Facebook with a gain of 18.11% while the worst performing holding was Verizon with a loss of 8.15%. There is also a matter of each stock’s weighting in the portfolio. Apple (18.03%) and Microsoft (8.91%) are the top two holdings in the XLK and during the period we are looking at, Apple was down 5.1% and Microsoft was down 7.16%. The XLK was down overall despite four stocks being up 12% or more. How? None of those four stocks are among the top four in terms of weighting. Meanwhile, the top four stocks in terms of their weighting in the XLK were all down.

The point we are trying to make is that when the market is choppy or without direction, a passive investment style can be beaten by an active investment style. Our Technology Long/Short model was up slightly while the XLK was down. We are not trying to say that our model was long Facebook and short Verizon. We are simply using the XLK as an example of how a long/short portfolio with the right stock selection, the right timing and the right weighting can be a big benefit to investors. The professional hedge fund managers that we have on the HedgeCoVest platform have years of experience in picking stocks and picking the times to buy and the times to sell. This experience shows in the relative performance of the long/short models.

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