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Author: keithcarrollCOM Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 17  
Subject: Hedge Portfolio Date: 7/1/2001 5:43 PM
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You might consider utilizing shorts in a market neutral hedge portfolio. I have been doing so for the last few years with rather positive results. The current hedge portfolio was begun on May 25, 2001 with a long portfolio of 10 stocks (Adobe Systems, Altera Corp, CDW Computer, Dell Computer, Lexmark International, Nokia Corp, Oracle Corp, Swisscom AG, Taiwan Semiconductor, Tellabs Inc.) and a short portfolio of 10 stocks (Choice One Communications, Clarus Corp, CTC Communications, Focal Communications, IDT Corporation, ITC DelaCom Inc., Jazztel plc, Neon Communications, Netia Holdings, RCN Corporation)

Because the equity of the long portfolio is the same equity used for borrowing and shorting the stocks in the short portfolio, you do not average the returns of the long and short portfolios, you simply add the results together. (That is, assuming the initial amounts invested in your long and short portfolios are equal).

From May 25, 2001 to Friday, June 29th, 2001, the Long Portfolio was down -9.41%, and the Short Portfolio was up 27.95% for a net increase of 18.53% in contrast with the NASDAQ which was down -4.19%.

Because of reduced systemic risk due to the use of a market neutral hedge I believe that the hedged returns can be increased with the use of margin. I personally feel comfortable utilizing 25% margin. After adjusting for commissions and the cost of borrowed funds, the 18.53% increase with 25% margin results in an approximate 23.95% margined return.
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