The Compact Model Portolio, which has been quiescent for a long time, has traded again. This time substituting FAS, which is the triple leveraged financials ETF for SDS, which is the double short S&P 500 tracking ETF. (The history of the composition of this index, and it's daily return relative to the benchmark, have are available on the blog side panel.) This trade actually occured on 20/10/2009, but I've been very busy on other projects and have been unable to update the blog for a while.

Astute observers of the Compact Model Portolio, which had been quiescent for a long time, will have noted that it has once more traded again. This time substituting EEM, which is the ETF following the MSCI Emerging Markets Index, for J.P. Morgan. (The history of the composition of this index, and it's daily return relative to the benchmark, have are available on the blog side panel.)

The Compact Model Portolio, which has been quiescent for a long time, has traded again. This time substituting J.P. Morgan (JPM) for Wells Fargo (WFC). (The history of the composition of this index, and it's daily return relative to the benchmark, is available on the blog side panel.)

New data, derived from a sample of 1000 funds, is now available for the Dynamic Trading Risk Factor. Before going into the performance of the factor, which I will do in a following post, I thought I would discuss some changes to the constituency of the Poor Man's Hedge Fund, our a portfolio designed to replicate the performance of hedge funds by investing in the common stocks of firms which have monthly returns well described by the factor.

The table shows the eight members of the XLF benchmark index that have the highest regression R² onto the dynamic trading risk factor. The membership of the portfolio is unchanged, although there has been some reordering in response to the new data. In particular, JNS has dropped out of the top 5 and been replaced by AMP.

At this time, I also decided to change slightly the relative composition of the portfolio. I have been constructing an equal weighted portfolio with 60% of the capital allocated to the member stocks and 40% to the hedge. From now on, those members will be individually weighted by their particular R² relative to the portfolio mean. The changes are actually slight.

In his recent post The Curious Incident of Hedge Funds During the Financial Crisis, Tadas Viskanta, mentions our analysis of the returns of Goldman Sachs and that they are well explained by the Dynamic Trading Risk Factor. Our conclusion was that Goldman generates it's returns by engaging in typical hedge fund trading activity, albeit with three times more leverage.

In view of this link, it seemed apropos to update the published charts with the most up to date data I have. In the prior post, I also stated that I personally held no investment position in Goldman Sachs. This is no longer correct. Largely as a result of the analysis referred to here, I now have a long position in Goldman (and other hedge fund like stocks).

I introduced the idea of Poor Man's Hedge Fund on 2nd. June. On the 8th., I decided to put the trade on, and have been holding and rebalancing this portfolio since that date. There has been only one modification, which was that I adjusted the universe size when evidence indicated that the portfolio size should probably be a little larger . That change was made on 25th. June.

The performance for the model portfolio traded is illustrated in the chart above. Almost immediately after the initial trades were executed, we were hit by the drop in Ameriprise, when they announced that they would seek $900MM of additional capital, diluting existing shareholders and dominating the performance of the portfolio for the first week. It took the rest of the month to get that money back.