The TrendExhaustion Market Neutral strategy is run in a private portfolio using a dollar-neutral approach, seeking to maintain 50% long and 50% short dollar exposures, without seeking beta- or sector-neutrality. The portfolio holds 20 stocks (10 long, 10 short) at any given time. This structure allows the portfolio returns to rely on the alpha generated by the strategy while balancing transaction costs with single-stock risk.
The portfolio is run using a real-time implementation of TrendExhaustion scoring, transacting daily on the 2 top-scoring buys and sells after filtering for transactional hindrances (i.e. low volume and high slippage) and announcements that limit future price action (i.e. merger/acquisition announcements).
Back-testing demonstrated, and practice confirmed, that the majority of average price reversal was completed within the first 5 trading days of a very high TrendExhaustion score, with diminishing returns afterwards. To take advantage of this, the strategy holds each position for 5 days, then exits to make room for a fresh batch of top-scorers.
The Market Neutral strategy has been fully invested since November 7th, 2011, but has been backtested since 2007. The combined (backtested & live) portfolio’s statistics, net of transaction costs, are available in the performance section, followed by a monthly historical performance table.
In each Market Neutral Stock Trade Alert, usually sent daily in the final hours of the trading day, you’ll get an email that looks like this:
We are opening the following positions:
- Buy DTV @ MKT
(current ask: $49.86*) - Buy SWK @ MKT
(current ask: $69.90*) - Sell Short AET @ MKT
(current bid: $43.21*) - Sell Short HP @ MKT
(current bid: $49.83*)
We are exiting the following positions:
- Sell SGY @ MKT
(current bid: $23.68*)
Bought on 10/5/2012 @ $23.48
7-day return: 1.03% - Cover Short FORR @ MKT
(current ask: $30.27*)
Sold Short on 10/5/2012 @ $30.15
7-day return: -0.20% - Cover Short GME @ MKT
(current ask: $22.74*)
Sold Short on 10/5/2012 @ $23.28
7-day return: 2.34% - Sell FTI @ MKT
(current bid: $44.17*)
Bought on 10/5/2012 @ $44.02
7-day return: 0.34%
All transactions are executed at market prices to ensure that it gets filled completely (noting the current market price at the time we got in). If you’re comfortable taking the chance of a non- or partial-fill, then feel free to limit orders for a potentially more favorable price.
Allocation is set to 5% of the total portfolio value per stock. Using the first opening trade as an example on a $100,000 portfolio, we would find the max allocation of $5,000 ($100,000 * 5%) and divide that by the current share price to calculate the quantity to buy or short ($5,000 / $49.86) = 100.28 or 100 shares.
For closing trades, we note the original entry date – usually 7 days ago – and the entry price, followed by the return (gain or loss) we’ve seen over those days.