Author: Brendan Ruchert-Dixon
Covestor model: Alpha Trapper
Disclosure: Short PST, VXX
February 2011 was a good month for the Alpha Trapper model. It was the first month since the model’s inception in December that its results really demonstrated the value of a hedging strategy. The first half of the month went a lot like December and January, with the stock market generally doing very well and the model just barely keeping up. Then starting on the 21st, things got more volatile for stocks, while the diversified model outperformed.
Most of the moves made in February were fairly minor and were for rebalancing, but I’ll describe my motivations for a few of them:
1) I increased my short position in ProShares UltraShort 7-10 Year Treasury ETF (PST) on Feb 8, when 10-year treasury rates had risen to 3.72%. By the end of the month, they had fallen to 3.41% (see ^TNX on Yahoo Finance – http://yhoo.it/ecNB5K). My reasons for shorting this and Direxion Daily 20+ Yr Treasury Bear 3X ETF (TMV) were described in my previous (1/11) report.
2) I re-entered a short position in iPath S&P 500 VIX Short-Term Futures ETN (VXX) on Feb 23. At that point, volatility had risen enough for me to feel that the potential profit from contango and a calming market was worth the risk inherent in the trade.
3) I briefly shorted United States Brent Oil (BNO) on Feb 24 and then closed it the next day. BNO is an ETF that tracks Brent crude oil futures much like USO tracks WTI oil futures. I shorted it because I feel that the February spike in oil prices, especially Brent crude prices, is temporary. I closed it the next day because I noticed that BNO is too thinly traded to be replicated in a Covestor model. That’s a shame, but if I find another way to make this trade that can replicated, I’ll do it (that could include shorting United States Oil (USO) or ProShares Ultra DJ-UBS Crude Oil (UCO) if WTI oil prices spike further).
