2013 was a decent, but not great year for the Downside Hedge portfolios. The hedged portfolio performed the best (which is normal in an uptrend) gaining nearly 25% on the year. In contrast, the S&P 500 Index (SPX) gained roughly 30% for the year. The under performance of the hedged portfolio is a result of being hedged (to as much as 50%) early in the year. From late May the portfolio only had a few instances of hedging while at the same time the longs in the portfolio had their largest gains and outperformed SPX which allowed the portfolio to catch up somewhat. For official tracking purposes I use a couple of ETFs that have fairly high beta as the longs. I’m very comfortable with the gains considering the fact that the portfolio is designed to catch most of the upside, but protect against catastrophic losses.
Below is a performance chart of the hedged portfolio.
The long / cash portfolios substantially under performed the S&P 500 index with the core portfolio gaining 20% and the long /cash portfolio that uses our market risk indicator gaining 17%. Large amounts of cash in the early part of the year is responsible for the under performance. For official tracking purposes I use the S&P 500 index as the long portion of these portfolios. As a result, the portfolio couldn’t play catch up with longs that rallied faster than the index. An investor that had a higher beta portfolio for the longs would have had larger gains on the year.
Below is a performance chart for the long / cash portfolios.
Here’s a chart that shows how our portfolio allocations changed throughout the year. The yellow lines represent adding hedges or raising cash. The green lines represent adding more longs to the portfolio and removing hedges or cash.