The Rieki hedge
The main purpose of having a portfolio is diversification, which reduces the risk. Investing with Rieki is about matching outperformers against underperformers. This is like investing in pairs. However, instead of developing individual pairs, matching an asset with another, say Suzlon (potential outperformer) versus Bajaj Auto (potential underperformer), Rieki portfolio lets you adopt a combination strategy. This new approach invests in two groups of assets and not just in individual assets alone. One is a group of outperformers and the other group contains underperformers.
How does this help? First it lets us pick up the best value from a universe of stocks. Second, it reduces risk by giving us the opportunity to short potential underperformers, hence reducing portfolio risk by creating a strategy hedge. Third, it increases our holding period for the overall portfolio. We can hold and accumulate the long spot for a longer period of time and similarly, we can hold futures beyond intraday volatilities. The Reiki portfolio accumulation approach of value picks keeps us prepared to capture the next stage of the bull market that should start in 2011.
Fourth, this approach also allows us to play according to the underlying bias of the market. If the intermediate multi-week market view is negative, we could churn our short futures portfolio actively. We could have more short components against few value spot picks (though the value hedge between long and short is maintained). The market bias can be judged by a trending system, by the ongoing VIX structure, by the view on rupee and by a host of factors. The long only, short only (LOSO) trending system that we use is negatively inclined now. In case the bias is positive, instead of short futures, one could look at using option strategies for the short side of the portfolio (for the potential underperformers).
| BEST/WORST PERFORMERS | |||
| Date | Asset | Price | Net value (INR lakh) |
| 8-Nov | Reliance (spot) | 1030.75 | -0.30 |
| 3-Nov | Tech Mahindra (spot) | 671.55 | -0.27 |
| 25-Nov | Suzlon (spot) | 51.05 | 0.24 |
| 25-Nov | Reliance Power (spot) | 160.05 | -0.47 |
| 24-Nov | Bajaj Auto (Short Dec) | 1606.90 | -0.16 |
| 24-Nov | Federal Bank (Short Dec) | 435.40 | 0.07 |
| 24-Nov | Bank of Baroda (Short Dec) | 902.55 | 0.15 |
| 25-Nov | Cummins (Short Dec) | 769.05 | 0.01 |
| 25-Nov | Tata Motors (Short Dec) | 1335.40 | -0.21 |
| 24-Nov | LIC Housing (Dec Closed) | 940.00 | 0.32 |
| 25-Nov | Axis Bank (Dec Closed) | 1353.00 | 0.24 |
| 24-Nov | LIC Housing (Nov Closed) | 1067 | 0.64 |
| 24-Nov | Bajaj Auto (Dec Closed) | 1650 | -0.11 |
We have assumed a leverage of four times for the short portfolio. This means an average leverage of two times for the overall portfolio. We created the Rieki portfolio with the best and worst components of the pair grid mentioned in our earlier features. It consists of four long trades (Reliance Industries, Tech Mahindra, Suzlon and Reliance Power) and five shorts (Bajaj Auto, Federal Bank, Bank of Baroda, Cummins and Tata Motors).
Starting November 3, the spot portfolio saw oscillation in value from -1 per cent to -10 per cent and closed on Monday (December 6) at -3 per cent. Barring auto and health care, rest of the indices are in negative territory for the period under study. BSE Realty, BSESC, BSE Consumer Durables, BSE MidCap falling 19 per cent, 14 per cent, 9 per cent, 8 per cent, 7 per cent respectively. Not only the Rieki long spot relatively outperformed most of the sector indices, but after hedging with short futures, the Rieki portfolio ended up completely hedged.
On the sector side, BSE Consumer Durables and NIFTY VIX remain the two extremities of the sector numeric ranking. BSE Auto, Healthcare, FMCG should underperform in the next weeks, while BSE Realty, BSE Metals, BSE Power and rupee futures are best hold and outperformers. So, Rieki will be looking for auto, healthcare and FMCG shorts and best hold (buy) opportunities in power and metals.
The intermediate (multi-week) view on the overall market remains negative. Any potential sub-minor correction up should end early next week after which Nifty should head towards our anticipated targets at 5,600-5,400 levels. The Indian rupee is retracing in a second corrective wave down, weekly RSI momentum took supports at 40 and points up from current levels. This should trigger further negativity on the equity side. We also expect further rise of Nifty VIX till 26-28 levels.
The author is with Orpheus Capitals, a global alternative research firm