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The Long Everything Portfolio

The current trend following portfolio has a very clear tilt towards the long side of, well, just about everything. We are long rates, long equities, long metals, long energies and even a little bit of long agriculturals. To be fair, we also have a few short positions but they are rather the exception at the moment. There is also quite a high number of positions open and given that each position is sized to have a theoretical equal risk, this means quite a high portfolio risk open.

You may wonder why it matters if our positions are long or short, given that the strategy is symmetrical and that there is a clear negative correlation between some of these positions. In the currency sector you could also argue that the distinction between long and short is rather arbitrary, as you are always long one currency and short the other. But, it still does matter if we have long or short positions.

Long positions are generally more profitable than the short positions and this has a very simple explanation. In part there is the asymmetrical volatility profile that many asset classes show where they tend to have choppier and more violent moves in a bear market than a bull market, but this is not the main story. The bigger story is much simpler. Our aim is to hold good positions for as long as possible and the really great positions which pay for a lot of the smaller losses will end up making quite substantial moves. If you have a long position which goes in your favor, it will grow larger with success and you will achieve a compound effect on your profits. On the other hand, if your short position goes in your direction, it will shrink to a smaller position the more profitable it becomes. The profit potential of a short position is lower than that of a long position.

MarketDirectionSectorEntry Date
Cattle-LiveLongAgricultural Commodities2012-01-25
CoffeeShortAgricultural Commodities2011-12-13
OatsShortAgricultural Commodities2012-01-13
Orange Juice-FrozenLongAgricultural Commodities2012-01-23
Sugar #11ShortAgricultural Commodities2011-11-25
Rice-RoughShortAgricultural Commodities2011-11-10
New Zealand DollarLongCurrencies2012-01-26
Australian DollarLongCurrencies2012-01-18
Japanese YenLongCurrencies2012-01-31
S&P 500LongEquities2012-01-11
Nasdaq 100 IndexLongEquities2012-01-19
Dax IndexLongEquities2012-01-27
DJ Euro STOXX 50 IndexLongEquities2012-02-02
CAC 40 IndexLongEquities2012-02-02
FTSE 100 IndexLongEquities2012-01-11
Crude Oil-LightLongNon-Agricultural Commodities2012-01-04
Gasoline-Reformulated BlendstockLongNon-Agricultural Commodities2012-01-19
GoldLongNon-Agricultural Commodities2012-02-03
Canadian Bankers' Acceptance-3Mth-ME (24 hr)ShortRates2012-01-03
Short SterlingLongRates2012-02-03
Canadian Govt Bond 10YrLongRates2011-11-24
T-Note-U.S. 10 Yr w/Prj AXLongRates2011-12-14
T-Note-U.S. 2 YrLongRates2011-12-08
Euro German BoblLongRates2011-12-15
Euro Swiss FrancShortRates2012-01-23
EURIBOR-3 MthLongRates2012-01-23
T-Note-U.S. 5 YrLongRates2011-12-08
Japanese 10yr Govt BondLongRates2012-01-12
Euro German SchatzLongRates2011-11-10
Eurodollar-3 MthLongRates2012-01-26
Euro German BundLongRates2012-01-10

The world equity markets has had a good run lately but unfortunately the trend followers have failed to keep up. Don’t worry, this is not an unusual situation and the futures will catch up again as they always have done in the past. The year to date return as of yesterday was -2.8%.