We received several great responses to our article on rules for dynamic hedge triggers. Many of you suggested alternative rules for us to consider. Two interesting suggestions from our members included 1) using a “double trigger” (50 and 200 period moving average) instead of just a single 200 period moving average and 2) using a "% price excursion" trigger above/below the index moving average.
Double Trigger
Here the rule still only looks at the tirgger at each month end but the strategy would now enter a 33% hedge (75% long/ 25% short) when the index closes below its 50 day simple moving average and a market neutral hedge (50% long / 50% short) when the index closes below its 200 day moving average. Similarly, the strategy would progressively ease up on the hedge level as the index crosses the 200, then 50 day moving averages at any month end.
% Price Excursion
This method looks at the trigger daily and would enter a market neutral hedge when the index closes below the % price threshold set for the strategy. We experimented with several % price thresholds and it looks like a 2.5% threshold is optimum when this rule is applied on a standalone basis (i.e. its not combined with other rules). So the hedge is triggered if the index closes 2.5% below its 200 moving average or lower on any day, otherwise the strategy is long only.
The graph below illustrates the performance of each approach relative to the simple month end, 200 period, single trigger we use currently. Thanks to all who took the time to send in their suggestions. Please keep them coming.
Reminder!
This is a great time to sign up for full membership and take advantage of our offer to take 50% off annual membership through 2012. Offer expires November 31, 2011.
