So I guess the world is going to be OK now. The VIX futures strip is back to contango (see my old trade idea…I never put it on, but let me know if you did!); equity markets are back in the green; bonds are falling back.
The thought of us pulling back from correction time made me think about my portfolio as a whole; in particular, what bits of my portfolio were really exposed to this sell-off, and which bits were aloof?
- Long-term risk premia: the majority of my book is occupied by long-term sources of return/risk premia. These include:
- Equity risk – about as standard as it gets. I have been hit in Europe/Asia/US stocks from this long beta exposure.
- Liquidity risk – I hold some closed-end funds and long-dated options (e.g. LEAPS) in the book. These weren’t hurt in the sell-off, as (unlike 2008) the negative move wasn’t due to lack of liquidity.
- Carry – right now this is mainly expressed through high dividend-paying stocks. Dividend yields are a bit more attractive now, and the recent sell off doesn’t affect the ability of most of these companies to deliver dividends (oil producers aside).
- Real estate – the real estate ETF in the book (IYR) has held value just fine.
- Volatility drag – As mentioned in an earlier post, I like to monetise this when I can. Equity vol hurt me on these trades, but they’re back to looking like a good long-term call.
- Medium-term risk premia: I classify trades lasting around a month in this bucket. Much less exposure than LT in my book, but some of the better recent performers.
- Momentum – the managed futures mutual fund has profited nicely amid the sell off in USD and oil. Gains in bonds helped as well.
- Carry – mostly expressed through selling option volatility. The beginning of the sell off was brutal for this (see the VIX chart – selling volatility into a rising vol market is not a fun experience). Now vol has come back, I’m feeling more chipper.
- ‘Rent’ – I proxy a rental income through selling option premium in IYR. I’ve found the yield is about 2x average rental yields, without the hassle of unclogging toilets. Given IYR didn’t really move, and vol stayed under control, this didn’t get hassled by the sell off.
- Short-term risk premia: I classify trades in the intraday – within a couple weeks in this bucket. Basically the trades I wouldn’t be able to do if I had a job away from my trading terminal.
- Swing trades – intraday trading of equity index futures. Depending on conditions, these trades may be momentum- or mean reversion-based. The sell off brought a lot of opportunities for these.
So that’s where I am. What next? Probably some more equity risk – maybe this time focused on the value risk premium.