Portable Alpha Daily

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Tuesday, September 19, 2006

Hedge Funds

The colossal losses triggered by Brian Hunter at Amaranth Advisors is certainly unfortunate, not only for the investors, but for the hedge fund and the industry in general. I’m sympathetic to Brian, in part because he’s a young trader cursed with enormous success immediately followed by unbelievable failure. Can you imagine the emotional roller-coaster he’s been on over the last few weeks? Undoubtedly others deserve a share of the blame, but for the time being he’s the guy credited with losing $5 billion in one week.

I’m hoping that it’s the banks and institutional investors reeling now, and not mom and pop whom un-knowingly have their pensions invested in the fund. If that’s the case, it’s a real shame worthy of oversight. Hedge funds are not bad investments; they’re just simply not for everyone. And every now and then, because managers use sophisticated leverage strategies and get locked into an investment, big time losses are incurred.

Short-Term Technical Indicators – Weakening slightly, but still in position to support new highs in both the Dow Jones Industrial Average and the S&P 500.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – There was a decent pop in the NASDAQ volatility index (VXN) overnight, as well as an increase in all three Put / Call ratios. I think a lot of the institutional investors are covering their shorts in preparation for a rally after the Fed meeting on Wednesday.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Fidelity NASDAQ Composite Index (ONEQ)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – Goldman Sachs iShares Semiconductor (IGW)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • NCI Building Systems Inc. (NCS)
  • Sanderson Farms Inc. (SAFM)
Today’s Top “Buy” Recommended Rydex Mutual Funds
  • Rydex Dynamic OTC (RYVYX)
  • Rydex Real Estate (RYHRX)
  • Rydex Dynamic S&P 500 (RYTNX)
  • Rydex Russell 2000 Advantage (RYMKX)
  • Rydex Dynamic Dow (RYCVX)


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