Hedging: Reader Q & A

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Reader Sig had this comment after reading my new e-book “The Simple Hedge Strategy:”

First let me thank you for your continued effort to educate and inform us neophytes. I really appreciate your efforts on our behalf.

My question is this: I have found there is a 90 day holding period on most mutual funds. Am I correct, and if so, how does that work with this hedging information?

Yes, that is correct. Most brokerage firms have a 90-day holding period. That does not mean you can’t make adjustments to your mutual funds, but you will be charged for it. With most brokerage firms that should not have other dire consequences, such as you being considered a frequent trader.

All investment advisors usually rebalance once a quarter. However, the brokerage firm will charge them (and you) an early redemption fee if executed within 90 days. In the case of my custodian (Schwab), that would be $50 per mutual fund adjustment. If you run into problems with rebalancing by using the buy-and-hold superpowers (Vanguard and Fidelity), I suggest you move your account elsewhere.

There are 2 ways to get around the early redemption problem altogether when using my hedge strategy:

1. Make your rebalance adjustment with the short position (SH), and you will only pay the ETF trading fee, which in most cases is around $12.95.

2. Use only ETFs, if that is your mode of operation, and you won’t have to deal with that issue at all.

I think these ideas will help you work around those common mutual fund limitations.

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Comments 8

  1. Ulli, can you show the math on this example?

    On 3/3/2009, I had to rebalance the hedge (as described in my e-book) since, due to market action, the hedge had become lopsided in favor of the short position by 61% to 39%

  3. HI Ulli,

    I appreciate all your efforts, but it seems that for me I would be better off just going to cash on a sell signal and stay there till a buy signal or just maybe when the Wilshire 5000’s 200 day SMA’s DMA line turns down buy PSQ and SH then relax till that that line turns back up. Your investment plan used to be so simple. All this monkeying around would drive me nuts. I realize being the originator of this so called “Simple Hedge Strategy” that you probably can make this work for you just fine.

  5. Ulli, first let me thank you for your efforts, I never miss a day reading your informative blogs. I do my own simple technicals and found your hedge system to work well for me as all I trade are ETF’s.

    When I get buy signals, I was basically naked with a calculated stop to protect me. By using your hedges when I buy I made good profits 4 days last week with MOO/SDS; EEM/EEV; and SMN/DBC combos, $25k each.

    But rather than hold the positions, I sold the combos in a few days and took nice gains.

    I even had one short stop out and the long continue up as I believe your program’s intent.

    Thank you so much for covering this gap for me and in stuying the perfomance/result, in the future I will let longs run to a sell signal and let the hedge drop out on the way.

    If you have any specific comments, I would always appreciate them. By the way, I invested $150k in the above ETF’s and made about $7k in 4 days. Thank you

    MK

  7. Ulli,

    Thank you so much! I went in today at +225 on dow with $25k each of: EWZ/DXD; IYR/SRS; MOO/SDS; and DBC/SDS…got stopped out of SRS, lost $3k today. Rest I still have.

    Thanks and I really enjoy your blogs and your comments.

    MK

  8. Ulli,

    In response to your March 9 blog entry, on avoiding redemption fees, I’d add one more way to do this. That would be to open an account directly, with a company such as Rydex or Profunds. That way you can trade in and out to your heart’s content, without incurring any additional trading fees. Thanks for your fine newsletter work!

    Kent…

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