Market Folly Custom Portfolio: September Performance Update ~ market folly

Friday, October 2, 2009

Market Folly Custom Portfolio: September Performance Update

It's that time again as we're back to bring the latest monthly numbers in from our Market Folly custom hedgefundesque portfolio created with Alphaclone. We've taken equity holdings from three prominent hedge funds in a unique strategy and have combined them with a 50% market hedge in order to provide downside protection. If you're unfamiliar with our MF portfolio, check out this post. To see what positions our clone invests in, check out the 14 day free trial to Alphaclone. Here are the latest numbers:


MF: +2.1%
S&P: +3.7%


MF: +11.4%
S&P: +19.3%

As you can see, our clone continues to lag the market, mainly due to the 50% market hedge we have employed. We also ran the performance numbers for our fund as if it was operating long-only and that iteration is outperforming the index. That's the great thing about Alphaclone is that you can pick and choose various strategies and degrees of hedging until you find the optimal combination. We selected the 50% hedge in order to limit drawdowns and to operate as a truly hedged investment vehicle.

After inspecting our longs, almost all of them are holding up just fine. So, as any truly hedged instrument is designed, we are capturing some, but not all, of the upward move. And, in downward trends, we severely reduce drawdowns. We'll be quick to point out that despite lagging the index for 2009, our portfolio didn't have much to do in the form of recouping losses. Case in point: The S&P was down 37% for 2008 while our portfolio was only down 5.6% for last year. So, we have already moved onwards and upwards while the S&P is still recovering massive losses from last year. Not to mention, our clone has only underperformed the market once (2005) ever since its inception back in 2000.

We need to reiterate that we are and always have been focused on the long-term. Everyone is so focused on month-to-month performance in the industry these days, and we're looking to distance ourselves from that in an attempt to generate alpha over a multi-year timeframe. And, so far, the clone has done just that. Since inception in 2000, the MF portfolio has a total return of 533% compared to -13.4% for the S&P. This equals annualized returns of 20.8% for our portfolio compared to -1.5% annualized for the index. Additionally, this was achieved with alpha of 17.1 and a Sharpe Ratio of 0.8. There's your outperformance right there. However, we must highlight that our clone does experience higher volatility than the S&P, but at the same time has suffered far less drawdown. We're merely posting up monthly numbers to give readers updates on our progress and to provide transparency.

Here is the current performance chart:

Additionally, for the first time we've included an Excel file that details our performance breakdown by various metrics. You can view the file on Google Docs here and we've embedded it below as well:

As always, head over to Alphaclone for a 14 day free trial to find out what positions our custom MF portfolio holds. Over the long-term, our hedged clone is definitely generating solid alpha and outperforming the index handily. We'll continue to provide monthly updates so stay tuned.

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